A trading desk is an integral part of a banking institution or a financial firm that offers buying and selling of financial instruments. This central location facilitates all the trading activities a firm provides, and some brokers offer their trading desks to clients.
Understanding what trading desks offer will provide you with insight into how brokerage firms operate and how you can benefit from those services. Let’s find out more about trading desks and the different types you can access.
Table of Contents
- What is a Trading Desk?
- 1. Client Services
- 2. Proprietary Trading
- 3. Advanced Technology
- 4. Studying Your Behavior
- 5. Market Liquidity
- Types of Trading Desks
- 1. Equities
- 2. Foreign Exchange
- 3. Fixed Income
- 4. Commodities
- 5. Derivatives
- Frequently Asked Questions
What is a Trading Desk?
A trading desk is an actual location, usually a department within a firm occupying an area known as a trading floor. This space is used to facilitate the buying and selling of financial instruments such as equities, bonds, commodities and currencies.
Since various assets are offered, it’s common for a trading desk to be segmented so that traders are grouped according to the financial instruments traded.
These physical desks are occupied by licensed traders employed by an institution because of their particular expertise in a specific asset class and market segment.
Trading desks generate revenue through various streams but mainly for facilitating trades. They earn a commission when a trader or a hedge fund buys and sells a particular asset by facilitating that trade.
Let’s explore each aspect of a trading desk’s services to find out how exactly it functions.
1. Client Services
You can use trading desks to receive services such as the structuring of financial goods and trading strategies compiled by professional traders.
These professionals also offer their experienced guidance in transactional cost analysis and provide support for an agreement between the investor and entities. Other services offered are identifying counterparties to a trade and identifying trading opportunities.
The professionals execute a client’s orders received for the sales desk assistants who are responsible for advising clients on the best trading strategies and opportunities for high-probability trades.
2. Proprietary Trading
Proprietary trading occurs when a banking institution or a financial firm trades stocks, bonds, currencies and other assets using its own capital to profit from market movements. Instead of receiving commissions by processing trades that clients open, these institutions strive to make profits from high-probability trades.
By using prop trading, the institutions have a higher chance of being profitable than regular traders because of the vast resources available to them that provide market information otherwise not available to the majority of market participants.
Because they hold this advantage, they believe that they can outperform the returns that the best index funds offer.
The proprietary trading desk consists of traders using various strategies such as index arbitrage and employs the assistance of advanced trading software, positioning themselves well in the market to increase the possibility of profitable trading and optimize returns.
Besides potential profits, prop trading enables these institutions to prepare themselves during periods of low liquidity when it’s difficult to buy and sell securities on the open market.
One of the problems of institutions using their own capital to trade is the potential to create a conflict of interest through front-running and insider trading. This can happen when the trading desk becomes the counterparty to your trade.
In such a case, your funds do not enter the interbank market but remain in the liquidity pool of that institution.
3. Advanced Technology
Trading desks use advanced technology and trading algorithms to increase the probability of profitable trades. The main advantage of using this technology is that it combines technical and fundamental analysis to scan the market for opportunities aligned with a predetermined strategy.
By using technology, trading desks eliminate the psychological aspect of trading, which has proven to be the downfall of many traders. Decisions to enter trades are based on data and strategies proven to be profitable that are devoid of emotion.
This technology aims to reduce common human errors and can open trades at any time that the market is open. But the professionals at the trading desks should monitor this technology as humans can make calls based on common sense, which trading technology can lack.
4. Studying Your Behavior
Some trading desks provide an analysis of a client’s trading behavior. This information can be useful if you need a second opinion about your strategy. The analysis is designed to study your preferences and your winning and losing strategies to help you focus on strategies proven by your history to consistently provide you with profits.
The analysis also can customize a trading plan suitable for your style so that you open positions aligned with your risk appetite and investment goals.
5. Market Liquidity
A trading desk can be occupied by several types of traders. A financial institution will position its traders at the desk to match buyers and sellers and enable clients to trade for their own accounts.
By using a trading desk for its own trades and offering clients locations to facilitate their own trades, financial institutions provide liquidity to the market.
Types of Trading Desks
Trading desks give you the option to open positions in various markets. Let’s look at some of the most active types of trading desks.
1. Equities
This desk mainly focuses on facilitating stock trades, especially equity investments. But some equity trading desks also offer exotic options trading.
2. Foreign Exchange
Approximately $5 trillion is traded on the forex market daily, making it one of the most liquid markets. The foreign exchange trading desk acts as a market maker by facilitating the trading of currency pairs.
This type of trading is also known as forex investing, used by a trading desk to engage in proprietary trading.
3. Fixed Income
If you want to trade corporate and government bonds, you’ll use the fixed-income trading desk. This desk also offers fixed-income investments that pay returns and other types of bonds.
4. Commodities
This desk provides services for traders wanting to open positions in precious metals such as gold and silver, as well as agricultural products, crude oil, wheat and other commodities.
5. Derivatives
The derivatives trading desk enables engagement in speculative trading by allowing you to trade options, futures, forwards and swaps.
Frequently Asked Questions
Q
What does a trading desk do?
A
A trading desk consists of trained professionals that help clients execute trades in various asset classes such as stocks, bonds, forex, commodities and other assets. It also participates in proprietary trading, involving the use of its own funds to open trades with the intent of locking in profits instead of relying only on commissions earned by facilitating trades.
Q
How do I get a job at a trading desk?
A
You need to apply to a banking institution or a financial firm offering brokerage services. It might be necessary for you to start at an entry-level position such as an assistant to an analyst before obtaining your license to become a financial advisor and professional trader.
