What is a Trading Desk, What it Does and How it Works

How Trading Desks Work

Trading desks exist either to make money from their own trading activities or to process client orders.

How trading desks operate depends on which type of trading desk is making the trades. A proprietary trading desk uses a firm’s capital to trade and make a return. Traders on the proprietary trading desk may be paid a percentage of their profits, or they may receive a salary plus a performance bonus.

Such trading desks may focus on one particular market or trading style, such as only trading stocks, day trading, or swing trading, while other desks may have multiple traders or groups of traders specializing in different markets.

This type of desk’s sole focus is to make money by buying and selling for profit in the financial markets. They also manage risk so as not to lose too much of the firm’s money.

Market-making firms or desks attempt to make money by buying and selling for profit, but also have obligations to the exchanges they are market-making for.

Market makers provide liquidity (buy and sell orders) in a particular financial market so that retail clients can easily buy and sell the asset when they want to. In other words, there are times the market-making desk must trade. Purely proprietary desks don’t have this obligation.

Another type of trading desk, often called a dealing desk, is where clients’ orders are handled. If you call your bank to place a stock trade, a broker from the bank’s trading desk will place your order for you. Similarly, a dealing desk may have hedge funds, mutual funds, or corporate clients.

The hedge fund sends a list of trades to the dealing desk, and the dealing desk executes the trades and sends the confirmations back to the client. The dealing desk charges a fee for its services. If you call your broker’s desk, they may charge you $50 or $100 per trade – as opposed to you executing it online, yourself, for a fee of $5 or $10.

The trading desk will work out commission structures for handling the orders of large clients. This type of trading desk may also make money off of proprietary trades or spreads (the difference between the price they can get in the market and the price they give the client), but their first priority should ethically be to the client.

Why Trading Desks are Used

If a dealing desk charges its clients a commission, then why use it? There are actually plenty of advantages to using a dealing desk as opposed to executing trades yourself.

Dealing desks make money off their clients via commissions. But if it is cheaper for a company or customer to process an order themselves, why pay someone else to do it?

Consider someone building a hedge fund, where the primary skill is researching quality stocks to buy. They spend their days doing research. When they come up with a trade idea, they may need to buy millions of shares of a single stock.

Such an order could take days or even weeks to complete, because they don’t want to buy all the shares at once which would result in the price rising which would increase the average price they pay.

Instead of doing it themselves, they have the option to pass the order along to a dealing desk – a group of traders who specialize in market execution of trades. The trading desk buys the shares over a matter of weeks, trying to buy at advantageous prices each day so as not to drive up the price before the order is filled.

An individual retail client may want a broker’s opinion before placing an order, and so they are willing to call the trading desk, talk with a broker, and have them execute the trade based on the details discussed. The client is fine with paying a fee for this service. Here are some of the pros and cons of using a trading desk:

A proprietary trading desk is only really used for one purpose: to make money for the owners of the dealing desk. If the owners, whether a firm or individual, of the “prop desk” aren’t making money, then it probably won’t be around long.

Market maker trading desks need to make money, but also fulfill their liquidity obligations to the exchanges they work for. They may need to provide so much liquidity per day or week, or at certain times when no other bids and offers are present.

Types of Trading Desks

There are multiple types of trading desks, and each one may specialize in a certain market, or provide services in all markets.

We already discussed three common types of dealing desks:

• Proprietary (makes money by trading)
• Dealing (makes money from clients)
• Market making (makes money from trading, with obligations to exchanges)

Each of these categories can be further broken down into trading desks that focus on a specific market. Each market is called a trading desk in its own right. There are:

• Equity trading desks – Handle orders for stocks and ETFs.
• Fixed-income trading desks – Handle trades in bonds and treasuries.
• Currency or FX trading desks – Process trades for currency exchange, or currency swaps or forwards.
• Commodity or futures trading desks – Deal with trades related to gold, oil, and commodities, typically in the form of futures contracts.
• Options trading desks – Handle trades in options, which trade on other markets such as futures and stocks.

Working for a Trading Desk

Interested in working on a trading desk? The qualifications you need will vary by country, and also the type of trading desk you want to work on.

I traded for a proprietary desk for nearly seven years before moving on to trade for myself. Here are the basics of what you will need if you want to trade for a proprietary trading desk, a dealing desk, or a market making desk.

Working for a proprietary trading desk or market-making desk

You will likely need a university degree in finance, programming, or another related skill. You’ll also be expected to have in-depth knowledge of a specific market and a proven track record of performance in that market.

While some prop firms hire new traders (no experience) and train them, this is becoming more and more rare. Market-making trading desks will typically want experienced and proven traders. You may be required to get a certain license or designation before you can trade.

Working for a dealing desk

On this desk, you will be dealing with client orders. Therefore, you will almost always need a license or designation before you can trade. What license is required will vary based on the country you are working in and the market you will be trading. A university degree and knowledge of a specific market are usual requirements.