What is a Trading Desk?
Trading Desk is a department in a banking institution or a company where securities like bonds, shares, currencies, commodities, etc. are purchased and sold to facilitate their own or client’s trade in the financial markets, and therefore it ensures market liquidity. Such desks usually earn commissions as a result of trading activities. It also provides support to clients with respect to the structuring of financial products, opportunities, and support agreements that take place between investors and entities.
How Does Trading Desk Work?
- Traders operate in a trading room (also known as the trading floorTrading FloorTrading Floor is a place where traders buy and sell shares, fixed income securities, commodities, foreign exchange, bonds, options, etc. It is the market segment in which dealers trade financial instruments in various exchanges, for example, Bombay Stock Exchange (BSE) and the New York Stock Exchange (NYSE).). A trading room in a financial marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces. usually contains multiple desks that happen to share a huge open space.
- They focus on a particular security type or market segment. These are occupied by traders that have a license to deal with a particular investment type like equities, securities, bonds, or commodities.
- These licensed traders initially use market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem. and electronic trading mechanisms for identifying the best possible prices for their respective clients.
- The client’s orders are received by the staff operating from the trading desks from the sales department that is totally responsible for providing suggestions on trade-related ideas to financial institutions and investors that have a huge net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus..
- Apart from this, trading departments or desks also helps investors with various other services such as structuring financial goods, supporting the agreement between investors and entities, etc.
Types of Trading Desks
- Equity – This can manage almost everything, from trading in equity to various other exotic optionsExotic OptionsExotic options, as the name suggests, are more complex variations of the simple vanilla options, in terms of trigger points, payoff determination, expiry, underlying assets and other such features. They are designed to suit to the needs of the partaking investors and therefore sell through the Over-the-Counter (OTC) market..
- Fixed-Income – It can very easily take care of various types of bonds, such as corporate bondsCorporate BondsCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value., government bonds, etc. Fixed-income trading desks can also manage bond-like instruments that are able to pay returns.
- Foreign Exchange – This acts as a market maker for allowing the purchase and sale of securities in currency pairs. Foreign exchange trading desks might also participate in activities pertaining to proprietary tradingProprietary TradingProprietary trading refers to the process adopted by the commercial banks and financial institutions to earn profits by investing their funds in the financial instruments rather than making commission by trading on behalf of their clients..
- Commodity – It emphasizes greater focus upon agricultural commodities, metals, gold, coffee, crude oil, etc.
- Forex – This is generally dealing with the spot exchange rate lying in an international exchange contract.
- Ease of Market Evaluation – This can help clients understand the market behaviour and learn the ongoing and upcoming movements in the market structure.
- Structuring Financial Goods – These are also capable of helping the clients with respect to structuring and conditioning of their financial goods and services.
- Supports Agreements – Assists the clients in supporting agreements that are made between investors and companies.
- Watching for Opportunities – It helps clients in watching for ongoing and upcoming opportunities. Clients, upon being able to learn about these opportunities, can easily design and take appropriate measures so that they can easily grab these underlying opportunities.
- Quality Targeting – It facilitates quality trading. That is, only those clients are targeted that are actually willing to take active participation in trading. It means that it is selective and quality targeting instead of unnecessary crowd targeting.
- Deeper Analysis of Clients’ Behavior – Facilitates the deeper analysis of the client’s behaviour by learning more about his or her characteristics, likes, and preferences and accordingly offering him or her customized investment opportunities.
- Cost Reduction – Helps in the reduction of unnecessary costs.
- Enhances Profitability – This reduces the cost burden, which ultimately signifies an enhancement in profit figures.
- Targeting Audience – It allows targeting the right audience, and the system does not target anybody just for the sake of targeting or initiating clients to make transactions in securities.
- Trading desks lack transparency. These offer limited transparency when it comes to evaluating performance, conducting analysis, and improving strategies.
- Related party transaction behaviour has been seen that clients are apprehensive of using trading desks since it is fully and sometimes in parts too controlled by third parties. These third parties make the use of the internal or sister-company trading desk compulsory. This kind of related transactions has resulted in various issues like the client’s finances are not spent as per what he suggested. The client’s money must be spent as per his or her requirements and willingness.
- Clients will have to pay a commission for the services is the other drawback of trading desks. These are not free services. These services are chargeable, and the clients will need to pay a commission for trading activities.
- The trading Desk is nothing but a desk or a department in a bank or an entity where various types of securities like shares, currencies, bonds, etc. are bought and sold.
- They usually charge a percentage of commission that is earned from trade-related activities. Equity, Fixed income, Foreign exchange, Commodity, and forex are some of its common types.
- It ensures there is the ease of market evaluation, structuring of financial goods, eyeing for opportunities, provides support to agreements between investors and organization, quality and selective targeting, provides a deeper analysis of client’s behaviour and characteristics, and so on.
- The drawbacks of trading desks are the presence of related party transactionsRelated Party TransactionsRelated party transaction is an arrangement between two related parties for the transfer of resources, services or obligations, irrespective of whether a price is charged or can affect the statement of profit or loss and the financial position of an entity., lack of flexibility, and a negligible amount of transparency too.
This article has been a guide to What is a Trading Desk & its Definition. Here we discuss the types of trading desks and how does it work along with advantages and disadvantages. You can learn more about from the following articles –