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 in order 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 the clients with respect to the structuring of financial products, opportunities and supporting agreements that take place between investors and entities.
How Does Trading Desk Work?
- Traders operate in a trading room (also known as the trading floor). A trading room in a financial market 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 makers 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 worth.
- Apart from this, trading departments or desks also helps investors with various other services such as structuring financial goods, supporting agreement between investors and entities, etc.
Types of Trading Desks
- Equity – This can manage almost everything from trading in equity to various other exotic options.
- Fixed-Income – It can very easily take care of various types of bonds such as corporate bonds, 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 trading.
- 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 behavior 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. This 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 behavior by learning more about his or her characteristics, likes and preferences and accordingly offering him or her with customized investment opportunities.
- Cost Reduction – Helps in the reduction of unnecessary costs.
- Enhances Profitability – This reduces 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 behavior 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 commission for trading activities.
- 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 behavior and characteristics, and so on.
- The drawbacks of trading desks are the presence of related party transactions, lack of flexibility and a negligible amount of transparency too.
This 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 –