What is a Trading Desk?

A trading desk can be a physical location or a department in a banking institution where the securities such as shares, commodities, currencies, etc., are purchased and sold to fulfill their or the client’s trades in the financial markets. It is also known as a dealing desk.

Trading desks can prove crucial to firms, as they offer expertise in transactional cost analysis, identification of counterparties, and the formulation of favorable trading strategies. In return, these firms can charge their clients a commission fee for these trading activities and services.

Apart from facilitating profitable trades, a trading desk also provides different helpful services to clients - such as structuring financial products, creating supporting documents, and identifying trading opportunities for arbitrage.

Depending on the nature of the financial institution, the trades on the trading desk may be facilitated for their proprietary account or brokers who bring buyers and sellers together. Trading desks allow trades to be executed instantaneously, allowing for arbitrage opportunities as well as injecting liquidity into the market.

In a more conventional sense, the traders working in financial markets are often found on trading floors or trading rooms. Each trading floor is made up of many trading desks that specialize in a specific type of security or a particular market segment.

The History of Trading Desks

Trading desks first appeared in the United States before the 1970s when banks like Morgan Stanley split their capital market businesses into different departments.

Following the regulatory changes introduced by the National Association of Securities Dealers Automated Quotations (NASDAQ) in the 1970s, all investment firms were required to set up trading desks. Thus, these banks began to consolidate these departments into equity trading rooms. Today, many asset managers outsource their trading desks to these financial institutions.

In the 1980s, the concept of trading rooms and trading desks spread to Europe, predominantly in the United Kingdom and France, resulting in a massive reform in the world of financial markets.

How do Trading Desks Work?

On a larger scale, all traders operate in a trading room, also known as the trading floor. This trading room usually houses multiple trading desks that share a vast open space. Every trading desk is occupied by traders that have a license to deal with a particular type of investment like equity, currencies, commodities, or bonds.

These licensed traders are selected based on their past performances. They use market makers and electronic trading mechanisms to identify the best possible strike prices for their clients. The trading personnel receives clients’ orders and executes trades according to the investors’ objectives and goals. Moreover, the trading personnel also receives all the necessary information from the salesperson responsible for recommending favorable suggestions on trading strategies.

Another use of trading desks includes the structuring of financial products and identifying arbitrage opportunities. For each trade order executed on the trading desk, the firm usually earns a commission from its clients. In other cases, broker-dealers may manage trading desks and act as counterparties to the investor’s trade.

The more the number of securities there exists in the market, the more traders can utilize different types of trading desks to make a profit.

Types of Trading Desks

The various types of trading desks that can be categorized based on the securities traded on said trading desks:

• Equity Trading Desk

  These trading desks manage and facilitate a wide range of trading, encompassing almost everything from equity derivatives to exotic options trading. The traders (sell-side) working at equity trading desks use the information research provided by analysts to suggest clients order specific favorable trades. Often, the equity sales trading desks are divided into those that facilitate trades for institutional clients and those that execute trades for hedge fund clients.

• Fixed Income Trading Desks

  Fixed income securities generally refer to bonds that have a steady income stream, such as the US Treasury Bonds or corporate bonds. Fixed-income trading desks facilitate trades with regards to these securities and also trade credit default swaps (CDS), a certain type of derivatives that can be used as insurance in the event of a bond default. Fixed-income trading desks can be further divided based on the riskiness of the bonds being traded.

• Foreign Exchange (Forex) Trading Desks

  It is very common for large investment banks to have forex trading desks since the forex market is the largest in the world. The traders that work at the forex trading desks act as market makers and handle trading in currency pairs. They might also participate in proprietary trading activities. Traders on the forex trading desk usually work with the spot exchange rates of foreign currencies.

• Commodity Trading Desks

  These trading desks mainly trade commodities such as agricultural products, crude oil, gold, etc. The desks are further categorized into hard commodities and soft commodities. Here, commodity trading can be done by way of futures as well as spot trading.