DD FOREX BROKERS

No Dealing Desk describes a trading platform offered by a forex broker that provides unfiltered access to interbank market rates of exchange.

KEY TAKEAWAYS

• NDD brokers allow customers to trade directly with the interbank rates.
• Direct access to interbank rates may help traders in some cases but hurt them in others.
• Trading with an NDD broker assures the trader that their broker has no conflict of interest with their trades.

Understanding No Dealing Desk (NDD)

In contrast to Dealing Desk, or market-making, brokers, who publish rates and prices that are similar, but not the same as, the interbank market rates, NDD brokers offer what is known as Straight-Through Processing (STP) execution of forex trades.

Forex brokers who use this system work directly with market liquidity providers. When trading through an NDD, instead of dealing with one liquidity provider, an investor is dealing with numerous providers to get the most competitive bid and ask prices. An investor using this method has access to instantly executable rates. They may use electronic communication network (ECN) methods to make it work.

The implications of dealing directly with the interbank market are twofold: the size of currency rate spreads and the amount of additional cost to make a trade. With an NDD broker, traders are exposed directly to the exact spread available to retail customers on the interbank market. Depending on the currency pair being traded, and depending on the dealing-desk broker being compared, NDD brokers may offer wider spreads. That means the cost to make a trade is greater (since retail traders must give up the value of the spread with each round-trip trade).

Additionally, an NDD broker may charge an exchange fee or a commission. Because they are passing the spread directly through to the customer, they have to charge fees some other way or face making no money for their services. In these two ways trading with an NDD broker may become more expensive over time by comparison to dealing-desk brokers.

Market Making Brokers

An NDD broker stands in contrast to market-making brokers who attempt to stand in between customers and the interbank market as a means of making trades (theoretically) quicker and more efficient. To do so, they accept the risk that they can anticipate changes in the market well enough to shield against market risk.

The intent, on their part, is to make trading convenient and less expensive so retail traders want to do business with them. To do so they do not aid the trader working directly with the interbank market, but rather make a market, or in other words offer trades, where they can bring the spread potentially the same or even closer than the interbank market rate. In such a trade, the retail trader benefits by paying less money. The broker benefits because they get to keep the entire spread.

The drawback is that to accomplish this, dealing-desk brokers make a market by often taking the other side of the trade—putting them in a direct conflict of interest with their customers. So long as they are highly adept at offering such pricing, and not straying from the interbank rates, this business model benefits both them and their customers. But that is not always easy to do, and some dealing-desk brokers have had to be subjected to regulatory oversight for running their business models poorly.

By using a dealing desk, a forex broker who is registered as a Futures Commission Merchant (FCM) and a Retail Foreign Exchange Dealer (RFED) can make enough money to offset trades and even offer more competitive spreads. If a no dealing desk system is used, positions are automatically offset and then transmitted directly to the interbank, which may or may not benefit the retail trader.