No Dealing Desk

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21 Aug, 2024

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A No Dealing Desk (NDD) refers to a trading platform where the clients' orders are directly routed to the liquidity providers in the interbank market. Investors benefit from the best deals by receiving highly competitive bids and asking prices. It also allows faster execution at instant exchange rates.

NDD is usually followed in the foreign exchange market, where banks worldwide trade currencies. No dealing desk brokers follow straight-through processing (STP) and electronic communication network (ECN) to allow the direct execution of orders automatically using algorithms. The system also eliminates the need for requotes, which further cause delay.

No Dealing Desk (NDD) Meaning

No dealing desk can be defined as the platform where the clients' orders are directly placed in the interbank market through automated systems. The clients can access the most competitive bid-ask prices anytime and place orders instantly.
Investors benefit from competitive prices, high responsiveness, lower spreads, enhanced transparency, and increased profits. NDD brokers, on the other hand, gain from additional fees charged for the feature.
Some examples of NDD brokers offering lower spreads include XTB, FxPro, Vantage, Eightcap, FXCM, etc.

No Dealing Desk Explained

No dealing desk is a platform mainly followed by institutional investors and experienced retail investors. The system allows them to place their orders in the interbank market directly. The interbank market is a platform where currencies are exchanged between financial institutions. The activities of these banks strongly influence the exchange rates.

NDD uses algorithm-based systems to link the investor and the liquidity provider. It does not mean that the investors directly interact with the interbank market. The algorithm allows them to place orders, get the best bid-ask prices, and choose among hundreds of providers. Further, the orders are executed instantly, leaving no room for lags. Requoting is not allowed, thus reducing delays.

Best deals in terms of bid and ask prices imply lower spreads. Generally, traders do not prefer wider spreads as it means that there is a significant difference between the bid and ask prices. It would be challenging to negotiate such a situation. When the spread is less, the investors are contented, and there is a high chance of contracting. Moreover, the system is more transparent.

There are two types of NDD systems – STP and STP plus ECN. STP brokers link investors with liquidity providers who make forex deals. ECN brokers go a step further and enable their clients to interact with other participants, such as banks, brokers, and even other investors on the platform, who can then engage in new transactions or contracts.

For all these benefits and added features, the NDD brokers charge additional fees or commissions from the investors. It is the price traders have to pay to take advantage of the best deals, be highly responsive to the market, and get almost direct access to the currency market.

Examples

Consider the examples to understand the concept.

Example #1

Suppose Jane is a retired investor. Through her broker, she obtained NDD access to the interbank market. Given Jane's ample free time, she devoted it to studying the bid and ask prices and analyzing the market thoroughly. With this careful analysis, Jane was well-prepared to make informed decisions before executing her orders. Once her orders were placed, the execution occurred swiftly, and Jane secured the best deal available that day. She didn't need to spend extra time monitoring the status of her orders or worrying about requotes from other interbank market participants.

Example #2

Suppose Gary believes that currency Y, currently trading at $75, will decrease to below $60 in the next few weeks. Within the interbank market, he encounters another investor, John, who anticipates that currency Y will surge to $90 during the same timeframe. Now, these two individuals can engage in an options contract, allowing them to profit from the currency's price fluctuations.

In conclusion, this hypothetical scenario demonstrates how individuals with different market expectations can come together within the interbank market to create opportunities for profit through options contracts. Their respective forecasts on currency Y's performance enable them to take calculated risks and potentially benefit from the currency's price movements, depending on whether it rises or falls as per their predictions.

Example #3

The FXCM case serves as a cautionary tale within the financial industry. FXCM, a major foreign exchange brokerage in the US, had marketed itself as a NDD broker, promoting the advantages of its no dealing desk execution over traditional dealing desk. However, a regulatory investigation unveiled a different reality.

FXCM was found to be directing orders to a dealing desk model and maintaining control over its liquidity provider, Effex Capital. This arrangement created a significant conflict of interest, as FXCM received rebates from Effex Capital while sending most of its clients' trades in that direction. The investigation also revealed practices that disadvantaged clients, such as the use of tactics like Hold Timer and Previous Quote, resulting in price discrepancies.

As a result of these findings, FXCM reached a $7 million settlement with the US Commodity Futures Trading Commission and decided to cease its operations in the United States. This case emphasizes the importance of transparency and the need for brokers to uphold the trading models they advertise, underscoring the consequences of departing from declared practices within the financial sector.

Dealing Desk vs No Dealing Desk

The table below provides a concise comparison between Dealing Desk (DD) and NDD trading systems, highlighting the key differences in how they operate and generate revenue for brokers.

Basis	DD	NDD
Definition	The platform where broker-dealers facilitate transactions and orders.	The platform where investor orders go directly to the interbank market.
Broker's Role	Brokers may take the opposite position in client's trades.	Brokers facilitate the investor's trade without taking an opposing stance.
Human Intervention	Broker intervention may be required for verification and analysis.	Automated and algorithm-based systems reduce human intervention.
Order Execution	Orders may involve delays due to broker involvement and quoting options.	Orders are sent directly to the interbank market for instant execution.
Requoting	It may involve requotes, potentially causing delays.	It requires no requoting, leading to faster execution.
Revenue Sources for Brokers	Profits come from taking opposing positions and standard brokerage fees.	Additional fees are charged for access.

Frequently Asked Questions (FAQs)

What is the difference between ECN and no dealing desk?

An electronic communication network (ECN) is a system that facilitates NDD transactions. NDD functions with straight-through processing (STP) systems. Some brokers provide ECN that allows their clients to interact with other participants in the interbank market, who can be banks, brokers, or other investors.

Is no dealing desk the same as a market maker?

No. In fact, dealing desk brokers are referred to as market makers and not NDDs. The reason is that DD brokers sometimes have to take opposite positions in their clients' orders to facilitate a transaction. Thus, they make the contract and do not link investors to an existing one. However, this is not the case with NDD brokers, who usually do not intervene in their clients' orders. They do not create trades.

Do all forex brokers offer NDD services?

No, not all forex brokers offer NDD services. While many brokers provide NDD options, some brokers predominantly operate with a Dealing Desk (DD) model, where they act as counterparties to client trades. Traders should carefully research and select brokers that align with their preferred trading model, whether it's NDD or DD, to suit their trading needs and objectives.