No Dealing Desk – The Next Blockbuster

“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’

2 thoughts on “No Dealing Desk – The Next Blockbuster”

  1. Nice to “meet” you and thanks Harpal.

    Great intro to DD versus NDD. I agree that agency brokerage is generally a good thing for the forex market.

    One thing you fail to mention though is the “muddling” that can and does still go on even at no deal desk shops.

    Those who learned to stay years ahead of regulators in their dealing desk tactics and made the most money from that model haven’t changed: they’re still after the largest number of pips possible from every trade. And some are willing to bend the definition of “agency” to get them.

    Their marketing machines ARE turned on – and are finely attuned to the fact that retail traders want to trust their brokers and want to hear “STP,” “NDD,” and “agency.” Whatever it takes to get more customers.

    BUT – traders who buy into these arguments should ask themselves:

    When is the last time my broker admitted they’d executed my trade poorly and credited me for the loss?

    Does my broker disclose the exact amount of markup they earn on my trades? On different currency pairs?

    When is the last time I received positive slippage on an entry?

    If you can’t answer these questions quickly and confidently, you’re probably leaving a lot of profit on the table. Or worse, in your broker’s pocket.

    Don’t get me wrong – There are great execution venues out there. But traders shouldn’t judge their broker by its label.

    Full disclosure – my company is a referring party to more than one FX broker and is compensated for referring traders. My goal is to make sure our clients are trading with the one that’s right for them.

    Justin Gilmore
    Shift Forex
    skype: shiftjustin

  2. hey harpal,

    to start with we have the same last name :). Anyway, i cannot agree more with you had written on the post here. I myself use to work with few major market makers that ran DDs and had seen some very “dirty” tricks played on clients. After many years in the industry, i finally decided to move on and about a year ago set up a NDD brokerage company and we are doing pretty good.

    I actually met a gentleman from your company sometime ago in singapore. Anyway, it does seem that there are products in your company that we can use to enhance our service and i am glad that you have the same passion and vision to deliver to the market what we too had set out to do.

    It would be awesome to have chat sometime soon. Do drop me an email when you get the time and lets see what we can collaborate on, or at worst have some “chai” together 🙂

    manmohan Sandhu

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