Dealing Desk or No Dealing Desk – That is the Question!

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GKFX are proud of their dealing desk and their fixed spreads. In this guest post Paul Hare, their Director of Trading, explains why. (Note that GKFX are a UK based broker, and are therefore regulated by the Financial Conduct Authority (FCA for short, and formerly the Financial Services Authority). Some of the regulatory points Paul makes don't work in quite the same way in other jurisdictions.)

There seems to be an increase, as of late, in the number of buzz words being bandied about by certain trading houses or brokers in their advertisements.

Whether it is them apparently bragging of having NDD or offering STP, DMA or even ECN. They give you a list of key reasons why you should trade with them because of this and that, often skimming over the surface of what they actually mean and what the real consequences of dealing with them are.

In brief NDD (No Dealing Desk) means or implies that the trades you do are being carried out directly into the market, with no interference from the trading house or broker you use. This is exactly the same for STP (Straight Through Processing) and DMA (Direct Market Access). ECN (Electronic Communication Network) is similar except extra liquidity is added by other traders placing orders.

In spread betting, and in some CFD companies like us, there is no commission charged on trades, as this is built into the price, so what you see is what you get. If the company does charge a commission like a traditional broker then the prices they are giving you should be exactly what they are being given by their liquidity providers. Usually using DMA or ECN would imply that you are charged a commission.

But with spreads as tight as they are, and getting tighter, and with more and more companies after your business, why would anyone want to pay commission these days? That is why I am more and more sceptical about the likely successes of ECN networks, including the new LMAX.

Everyone knows the huge transformation that the retail trading sector has undergone over the last five years. Spread betting and CFD companies have invested massively in IT to try and provide their customers with the most advanced and sophisticated trading platforms, and hopefully lure away other companies’ customers at the same time.

All of this has been excellent news for the end user. But ultimately you can have the best platform in the world, with it being downloadable, web tradable, iPhone, Android or Windows compatible, but if your prices are no good then what is the point?

Pricing

Pricing is not just about spread, which many people think. It is about consistency of spread. If it starts to get a little busy or volatile and the spread widens, well that is when most people like to trade, so not much use there.

It is also about liquidity, i.e. how much can you do at that price. There are several platforms available whose spreads widen the bigger the trade you attempt to put on. While there is logic to this, surely this should only happen for larger trades, which does not concern most retail clients.

Last, but not least, is the reliability of the price, i.e. can you actually get a trade on. It is all very well saying spreads from 0.5 pips but if you can never manage to get a trade on at that price then what is the point?

Dealing Desks

Traditionally trading houses or brokers had what is known as a dealing desk. This was a desk with traders monitoring trades done on the phone, or on line as it became more popular, and then hedging the desk’s position into the market place as and when they felt it was appropriate to do so.

At certain companies over the years there have been a few accusations made that these desks manipulated prices by ‘tweaking’ them in one direction to trigger a client’s stop loss for example. While it is impossible to say that this never happened, it would have been somewhat unlikely given that even in the unregulated FX market it is possible to check where a price got to and then make a complaint.

These days, with regulation the key word, all UK trading companies are bound by FCA (formerly FSA) regulation and must adhere to the rules laid down by MiFID which basically insists that clients are given the proper and correct price. So any manipulation of this sort would be illegal.

So given the fact that dealing desks are governed and accountable in this way, why would a broker advertise that they do not have a dealing desk, as in NDD (No Dealing Desk)?

The simple answer is that some companies have done away with dealing desks to save money and are trying to justify that by making out it is in the client’s interest.

They say that as you have no dealing desk you will never get a re-quote from a dealer. Well that is true enough, but you may get one from the computer. Failing that it will just either reject your trade outright, or it will fill you where it thinks the market actually was when you traded, depending on how it has been set up.

They say that up to 10 banks are competing for your business. What that means is that 10 banks are feeding them prices and the best bid and offer is calculated, with a little extra spread added for the broker, and then given to the customer.  So how does that differ from a company that actually has a dealing desk and who has the same 10 banks giving them prices which they take the best bid and offer for?  In truth it makes no difference what so ever.

They say the banks cannot see your orders so with NDD nobody can attempt to trigger your stops by pushing the market. But as I have already said, it is illegal for a broker to manipulate prices, and you can see if they have, so what is the advantage there then?

They say no maximum deal size. Well unless you are Gordon Gekko that is not really going to be of concern to you.

They say scalping over news welcome. While this is probably true enough to begin with, the end bank that gets hit with the trade that costs them money monitors things. If they keep being hit in this way they will widen the spread they make to that broker or eventually pull their line. Faced with that, the broker will close the clients account.

The other problem all platforms can suffer from time to time in price latency. This is when the trading price shown on the platform is lagging the real price. This can be caused by many reasons including poor internet connections and too many price updates for the platform to handle during particularly volatile periods. Some ‘latency scalpers’ try to take advantage of this, and when their account is then subjected to additional price verification checks, which can slow trading down by a second or so, get upset and start complaining on forums. Some might argue this is attempted fraud so they get no sympathy from me, and it does not matter whether you offer STP or not, these people always try it on.

They say there is transparency of pricing. How does that work then? Give the client a price where the spread constantly changes and so does the amount they can trade. Unlike ours which is fixed, and what you see is what you get, no other hidden charges or commissions. You cannot get much more transparent than that!

Then there is my favourite. They say there is no conflict of interest between broker and trader. I assume here the point they are trying to make is that with STP deals are automatically hedged as they are done. So the broker concerned does not care in the least if you make money or lose money. They just hoover up the additional spread or commission. Charming! So you are just some faceless account number that pushes buttons on your terminal.

What happens when you have a query about being stopped out of a position with a harsh fill? They will just say well that's where the market was! That is of course if you get to speak to anyone who knows what is going on, because if you remember, they have No Dealing Desk.

For those companies that have dealing desks, yes it usually means that clients positions are not hedged straight away, they go into a "pot". In an ideal world one client would sell something at the same time as another bought it, enabling us to capture the spread. But the world does not work like that.  One client might sell 10 pence of GBP/USD while another buys £2 of Vodafone. What should I do? Sell 1,600 GBP/USD in the market and buy 200 Vodafone shares?  They are too small. So they go into a pot and are hedged into the market when a position gets big enough, or straight away if the trade is of a reasonable size. We have strict internal rules on when this must be done. We often can have the same position as the majority of our customers.

There is no conflict of interest. We want our clients to make money and trade more and to tell their friends. The more they trade then the more spread they pay. Losing clients obviously have less to trade with and if they stop trading need to be replaced through advertising etc. which all adds up. That said though, there are some companies who do deliberately take on some client risk (i.e. the opposite side to a trade) as part of their business strategy. So what? They cannot manipulate prices and must treat you fairly and you have the financial ombudsman you can complain to. So you are protected. I would love a spread betting company to ring me up and say sorry you are making just too much money so we are going to have to close your account. I live in hope!

It should be noted that for a company to run a clients position (i.e. take the other side) this ties up a lot of capital. A rough calculation is that a company must have 8% of the notional value of that trade in capital in the bank to run the position. Multiply this by thousands of clients and positions and this becomes very expensive, and this is monitored very closely by the FCA.

If you were to believe these STP brokers then it’s amazing that any clients ever made money before they came along, which of course they did.

Some companies offering STP say your orders get executed quicker by them. Well this depends totally on the trading platform being used, so that is not really an argument. Also with STP only part of your order may get done. Invariably this would mean all of a stop, but only part of a limit order. With us, if your limit order is triggered, then it would all be done.

Spreads – Fixed or Variable?

With regards to spreads, let’s talk about EUR/USD for a minute.

GKFX quote a 1 point fixed spread. This price comes from those same 10 banks that are feeding an STP company their price. But we keep ours fixed. Five seconds before Non Farm Payrolls we are still 1 point wide. How about an STP company?  5, 10 or 20 wide?  Well there's service for you!

Also bear in mind that stop loss orders are triggered based on these prices. So if a price widens to say 10 points on or before figures then you might be stopped out. When you call up to complain you will be told by the Non Dealing Desk employee (who probably knows about as much about FX as I do about bio molecular nuclear physics), that the market must have been there for the order to have been triggered, so tough. With us of course, fixed at 1 point wide, you would not have been stopped.

Sure there are some currency pairs that in quieter times may get narrower than our fixed spreads, but to be fair, not by much. So you have to weigh up the pros and cons. Personally I would always rather know what spread I am going to get, as you might go into a trade on a 1 point spread but have to get out of it on say 5 points.

The other downside of STP is that you can only trade in whatever amount the bank who is showing the best price at the time feels like. That might be from 0.5mio notional for example. In GBP/USD that equates to approximately £30 a point. Our prices in GBP/USD are good in £50 at all times.

Owing to the size of the FX market in general there are of course thousands of articles written by people in the industry and by armchair experts at home. Everyone’s opinion is equally valid, but some comments written on some of the forums are a little worrying at times.

Generally speaking if you open an account with a fully FCA regulated company then you should be absolutely fine. Each company may be better at certain things compared to others, but ultimately you are the customer and have the full might of the FCA behind you. If you open an account with some bucket shop in Cyprus or Gibraltar then you only have yourself to blame.

What is best? It depends on you!

Personally I like fixed spreads and having the certainty that, barring something catastrophic, I know I will be able to close a trade on the same size spread as when I opened it.

I do not do massive trades, so deal size is not really a problem for me. But for those of you who do trade on the larger side you need to know that you can get your size done without any issues.

I like to know that I can ring up and speak to a dealer who is actively involved in what has been going on to ask a question or find out why a stop was done.

I like the knowledge that if liquidity dries up, due to holidays or important figures, that the company I deal with has a dealing desk giving their clients additional liquidity to keep things normal.

Sadly not all companies with dealing desks can offer all of the above, as ultimately you are only as good as the staff you employ. Something that senior management of a few companies have recently found out to their cost.

We currently do offer an STP MT4 platform for our FX/CFD clients, if they want it, but the overwhelming majority prefer the fixed spreads that we make. We hope soon to be able to offer STP on the spread betting platform as well in case anyone should want it. This will almost certainly have a higher minimum trade size due to the problems mentioned earlier. However if the demand is there, we will supply it.

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Comments on Dealing Desk or No Dealing Desk – That is the Question! Leave a Comment

November 13, 2010

Mario @ 8:47 am #

Great article – really clarifies things for me. I've been using SmartLive MT4 SB for a few months and it's been good. The only possible chance for them to be overtaken in the SB market (I think!) is if someone can offer MT4 + smartphone SB. But I think I'd stick with SmartLive. I've queried the odd closed trade and always received a satisfactory response. One last thing, certain bits of their website (e.g. FAQ) are really hard to read and scroll through.

January 16, 2011

heatonfan @ 10:16 pm #

Very good article – thank you.

Think this should be required reading for many people new to spreadbetting who will be told over and over again on forums about SB companies adjusting their prices to deliberately take out their stops (when trading £1 a point on cable!!!!) and other such paranoid nonsense.

July 14, 2012

Jon @ 1:27 am #

Technically every broker is a market maker. If you read the terms and conditions of service, the broker becomes the counterparty of your trades.

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