Jun 13, 2022
A trading desk is a part of an investment bank. Trading desks may be segmented according to market by an investment bank. It's possible to subdivide each of these sectors further. When it comes to fixed-income investments, you may find everything from ultra-safe U.S. treasuries to dangerous, low-grade business bonds, or "junk bonds," as they're known. Investment banks can fragment their trading desks to focus on specific niches within the primary areas.
Buying and selling securities is carried out on a trading counter, a physical area where these transactions take place. Some financial institutions have trading desks dedicated to proprietary trading, while others have brokers who operate as intermediaries between buyers and sellers or a combination of both.
In most financial institutions, trading desks are present to facilitate transaction executions in various markets, such as stocks and fixed income instruments. Liquidity in the market relies heavily on these services.
Trading desks make money by taking a cut of the deals they execute in the form of a commission. Instead, a hedge fund may use an investment banking firm's equities trading desk to make trades, paying a small commission on each transaction. Brokers can run their trading desk by acting as the counterparty to deals executed by their clients.
There is a possibility that these trades will never reach the interbank market and will instead remain in the broker's internal liquidity pool. Depending on the sort of securities being traded, there are a variety of trading desks. These desks are sometimes segregated and may be positioned in the middle of the exchanges.
Trading desks allow investment organizations to divide different types of assets and marketplaces, which operate under other laws and require various certifications, into distinct trading desks. For example, if you are a stock trader, you must pass a test and register with the CFTC and the National Futures Association's license and registration requirements. The stocks and commodities desks are separated, so there is less friction between the traders of both assets.
A forex trading desk may be found in nearly every significant investment bank. The currency market dwarfs equities and fixed income. According to the Bank for International Settlements (BIS), there is an average of $6.6 trillion in currency trade per day. Institutional investors, such as investment banks, are responsible for the bulk of this trade. The high liquidity of forex trading appeals to traders since it allows them to take up huge positions and exit trading positions quickly.
Currency pairings are used to price Forex contracts. Traders, for example, place wagers on the direction of the dollar's movement against the yen (USD/JPY). Around 88 percent of all forex trades are conducted in U.S. dollars, followed by European Union (E.U.) currency, the Japanese yen. 1 On a forex trading desk, the spot exchange rate of a foreign currency contract is the most often traded currency.
There are many types of fixed income, including government bonds, U.S. Treasuries, and private sector bonds. The fixed-income trading desk can be used to trade credit default swaps (CDS), which are derivatives that guarantee against the default of the issuer of a corporate bond or governmental debt.
An investment bank's equity trading desk can handle everything from equities sales and trading to equity derivatives and exotic options trading. Stock trading desks' sell-side traders use research analysts' reports to develop sales ideas for their customers. A percentage of all deals executed through the trading desk is paid to the trading desk. Traders on the equity sales desk take orders from customers and manage them. Trades for institutional and hedge fund clients are often separated on the trading desk.
For example, hard commodities like crude oil and soft ones like agricultural items such as soybeans and rice are examples of commodities. Soft goods have a limited shelf life, but hard commodities have a considerably longer shelf life. Some investment banks may have different commodity trading desks for hard and soft commodities.
Still, others may have separate desks dedicated to a single commodity, such as crude oil, depending on how much trading they undertake. Futures trading and spot trading are two methods of trading. The price and delivery of the commodity are determined immediately after the contract is signed. This type of trading is known as spot trading. The price is agreed upon instantly in futures trading, but delivery is set for a future date.
Broker-dealers may also provide their clients with trading desks in the stock day trading or foreign exchange markets. As a result of their capacity to trade immediately, intermediaries are in a superior position. Most of the world's largest investment banks have their trading desks, which they utilize to service their clients and employees. Because of this, institutional trading desks can maintain good performance for a lengthy period. Most of these companies also use decentralized trade desk services to improve customer satisfaction.