“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.
“Lost in Translation”
Here are a couple of important points that sometimes get lost in the discussion.
In this set up, brokers rely on external liquidity to provide pricing for their customers. As a trader, it becomes as important to evaluate the broker you are about to do business with, as well as that broker’s ecosystem: the quality of the liquidity streams to that system and where and how the broker gets access to it.
Transparency breeds trust. Trust fuels market growth. It’s a simple as that. As people become more comfortable with their trading environment because they know they are treated fairly, they will turn into more active market participants. Also, fence sitters are poised to enter the market more quickly.
I don’t predict that no-dealing desk will be the only model going forward. If history has taught us anything, it’s that FX market participants like choice. However, we believe that the non-dealing-desk set up offers so many advantages; it will capture a significant share of the market.
“You got to ask yourself one question: Do I feel lucky? Well, do you punk?”
Clint Eastwood put it best. It is well understood that retail FX is (and always will be) a risky business. The no dealing desk approach to executing orders doesn’t change that fact. What it changes however is the uncertainty of whether it was an intermediary muddling with your order, or your own doing, if you end up with a trading win (or loss) at the end of your day.
One last movie reference:
In Order of Appearance
“Welcome back Kotter” – The title of an American television sitcom from the mid-seventies
“Take your stinking paws off me, you damn, dirty …” – Legendary Charlton Heston quote from the 1968 movie ‘Planet of the Apes’
“Lost in Translation” – Title of a 2003 movie by Sophia Coppola
“You got to ask yourself one question: Do I feel lucky? Well, do you punk?” – Famous question asked by Clint Eastwood in the 1971 movie ‘Dirty Harry’