My cousin is a waitress and a cook who has worked in many restaurants around town. It is always difficult to go out to dinner with her. “How about this place?” I’d ask. “Oh no, I’ll never eat there!” she would retort. We usually go through two or three different suggestions before arriving at a place she is comfortable with. Her opposition is not because she is a picky eater. It’s because she’s worked in that restaurant and saw how the food was handled!
Needless to say, there are a lot of restaurants where I can no longer eat.
Having seen a number of dealing desks over the years, I feel somewhat like my cousin when I think about the forex prices coming from a dealing desk. Sure, the EUR/USD price looks OK when the plate hits the table, but once you know what can happen behind the scenes, you lose a bit of your trading appetite.
As a follow up to my last post, which showed how No Dealing Desk (NDD) forex execution works, I’d like to show you what some dealing desk can do. I hope you brought some antacid.
As dealing desks are largely invisible to most traders, we’ve created a useful map and video of the dealing desk execution model: Watch the Video
Now, take a look at the above picture and compare it with the NDD picture from my last post. There’s one big thing that the dealing desk has that the NDD system does not—a person sitting in the middle.
Even today, more than a decade into the “Internet age”, dealing desks are still manned 24 hours a day by human traders. And these humans are exactly that—traders. Their job is to make money.
These traders sitting in the middle of your trades can do several things:
Make Up Their Own Prices: Dealing desk prices don’t come from a bank. As market makers, a dealing desk makes its own buy and sell quote for every currency pair. And it will always try to make a quote in its best interest, which might be different from your best interest.
Re-Quote Orders: If a dealing desk does not feel like filling your order at the price you requested, it can give you a new price to accept or reject. This can happen multiple times, ruining your entry or exit.
Take the Other Side of Your Trade: Many dealing desks routinely hold on to their clients’ trades, rather than hedging with a bank or market maker. That means that the dealing desk has a market position and market risk. They can lose money when you make money. They can profit when you lose – and the bigger your loss, the bigger the dealing desk’s profit. Considering that the dealing desk can make up its own prices and re-quote your orders, this can create what I think is a pretty nasty conflict of interest: the guy who will make money when your trade goes wrong controls your pricing and execution… and he knows who you are and where your stops are.
To see how these work in detail, I highly recommend that you check out the video.
FXCM, with our No Dealing Desk forex execution, doesn’t (well, pretty much can’t) do any of this with our forex prices or our clients’ trades. All our forex prices come from third-party market makers, and our computers add a markup.* We don’t re-quote orders. We hedge every forex trade with a bank or other market maker, and those market makers don’t know who you are or what your pending orders might be. To read about the risks associate with No Dealing Desk execution please click http://www.fxcm.com/trading-execution-risks.jsp.
FXCM used to run a dealing desk. We came to believe that the practice was unsustainable, and invested considerable time and money to create No Dealing Desk forex execution. Now, like my cousin who can’t eat at half the restaurants in town, I believe that many traders feel the same about trading with a dealing desk.
*Please note that prices displayed include a small mark up in the spread. Active trader accounts, accounts opened through special arrangements and certain accounts referred to FXCM by a third party may include additional fees and charges.
