Trading Desk

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?

Trading-Desk

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Source: Trading Desk (wallstreetmojo.com)

Types of Trading Desks

  1. 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.read more.
  2. 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.read more, government bonds, etc. Fixed-income trading desks can also manage bond-like instruments that are able to pay returns.
  3. 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.read more.
  4. Commodity – It emphasizes greater focus upon agricultural commodities, metals, gold, coffee, crude oil, etc.
  5. Forex – This is generally dealing with the spot exchange rate lying in an international exchange contract.

Advantages

  • 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.

Disadvantages

  1. Trading desks lack transparency. These offer limited transparency when it comes to evaluating performance, conducting analysis, and improving strategies.
  2. 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.
  3. 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.

Conclusion

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 –

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