Posted: April 12th, 2010 | Author: Harpal | Filed under: DMA, No Dealing Desk, Risk Management, Uncategorized | 1 Comment »
How inventory got its bad rap
Traditionally, enterprises viewed inventory as a way for a company to store value, and as a safety feature to ride out market fluctuations. It was perceived to be a good thing. That view has changed dramatically with the advent of information technology that made just-in-time (JIT) delivery possible. As I will explain, reducing inventory also reduces market risk. In FX, just-in-time delivery of currency rates holds the promise for FX brokers to eliminate a major headache that has been a source of major risk taking in the past: Internalization of deal flow. I think JIT will fundamentally improve the risk structure of a broker. Given the reduced risk, brokers will begin to divert their energy to marketing and sales with the eventual goal to lower their prices to the optimal level to maximize market share and overall profits, not marginal profitability.
Why holding inventory equals holding market risk
The simple truth is that inventory is costing you money in more ways than one. Obviously, it is tying up capital because there are costs associated with you acquiring products and holding them. It might be less intuitive that you also just bought yourself market risk, i.e. you are now on the hook for your product to sell as predicted. If it doesn’t, you will have to discount it later just to get rid of it. Because companies know all this, their initial go-to-market price needs to be higher to account for said risk, in addition to covering costs and a profit margin. Read More »
Posted: February 19th, 2010 | Author: Harpal | Filed under: No Dealing Desk, agent | Tags: Agency, NDD, No Dealing Desk | 2 Comments »
“Welcome back Kotter”
We noticed that an old favorite of ours has been getting more and more recognition in discussions about the best way to organize FX markets. I am talking about an organizational element that is sometimes referred to as ‘no dealing desk’, an ‘agency model’ or even’ straight-through-processing’ for retail FX brokers. (This latest descriptor might be the most confusing one, given the meaning STP has in institutional markets.) What is NDD and why does the term bubble to the top in numerous industry conversations these days?
“Take your stinking paws off me, you damn, dirty …”
No-dealing desk describes an order flow where a customer puts in an order with her broker. Instead of the broker touching the order – internalizing it, or filling it in the market on his terms – the order is passed on without interference to a third party that executes it in the market for the best price available at that moment. The beauty of this arrangement is that customers will always get a fair execution. Brokers obtain new leverage to increase their market share because they no longer have to worry about exposure and related capital requirements that limit how fast they can grow. They can really turn on their marketing machine. Last but not least, regulators are at ease because there is less room for a possible conflict of interest between trader and broker/market maker. Also, brokers tend to be more upfront about their pricing models (usually a fee, a spread or a mixture of both). For regulators, such a transparent market is easier to regulate. Read More »