A trading desk is a designated area of an investment banking firm, bank, investment firm, or trading floor dedicated to the sale and purchase of specific types of securities. Many financial institutions have separate trading desks for the forex, fixed income, commodities, and equities markets. Some may further subdivide to handle more specialized securities or markets. The Federal Reserve also has a trading desk that trades securities to stabilize the markets.
Forex desks are the most common trading desks because the global foreign exchange market is much larger than the equities and commodities markets. Do not confuse trading desks for Agency Trading Desks, which are used to buy audience access for advertisements.
Key Takeaways
- Investment banks typically divide trading desks into four main sectors: forex, fixed income, equities, and commodities.
- Forex trading desks are crucial due to the size of the global forex market, which averages $7.5 trillion a day.
- Specialized trading desks allow firms to handle different assets efficiently, given varying rules and certifications.
- Equities trading desks generate revenue through commissions from executing client trade orders.
- Commodities trading can be split between hard and soft commodities, with some banks specializing further based on trading volume.
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Advantages of Specialized Trading Desks in Investment Banks
Specialized trading desks allow investment firms to separate different kinds of assets and markets, many of which trade under different rules and require different certifications. For example, commodity traders must be licensed and registered by the National Futures Association, as well as the Commodity Futures Trading Commission. Stock traders have their own exam and licensing requirements. The separation between the equities desk and the commodities desk allows both assets to be traded with minimum friction between the different traders.
Understanding Forex Trading Desks
Every large investment banking firm has some form of forex trading desk. The forex market is the largest in the world, dwarfing equities and fixed income. The Bank for International Settlements (BIS) estimates forex trading at an average of $7.5 trillion a day.
Most of this trading is done by institutional investors such as investment banks. Traders are drawn to forex trading because it is highly liquid, meaning they can take on large positions and get in and out of trading positions with ease.
Forex contracts are quoted in currency pairs. For example, traders take bets on whether the dollar will rise or fall in relation to the yen (USD/JPY). The U.S. dollar is the most heavily traded currency, taking up about 88% of forex trading volume; next is the euro and then the Japanese yen. Traders on a forex trading desk usually deal in the spot exchange rate of a foreign exchange contract.
Fast Fact
Almost every bank has a forex trading desk, since the foreign exchange market is the largest global market.
Exploring Fixed-Income Trading Desks
Fixed income generally refers to anything that has an income stream, from government bonds, such as U.S. Treasuries, to corporate bonds. Credit default swaps (CDS) are derivatives that insure against default by the issuer of corporate bonds or sovereign debt and can be traded on fixed-income trading desks.
Sometimes an investment bank subdivides its fixed-income trading desks so the derivatives desk dealing in CDS is different from the trading desk dealing in the less-risky U.S. Treasury bonds, or the desk dealing in the riskier corporate low-grade bonds also known as junk bonds is separate from the desk dealing in higher-grade corporate bonds.
Debt issued by developed countries may also be traded on a desk that is different from the desk that deals in the sovereign debt of developing countries.
Navigating Equity Trading Desks
The equity trading desk of an investment bank can cover anything from equity sales or trading to equity derivatives trading and exotic options trading. Sell-side traders on equity trading desks use information from research analysts’ reports to try to generate sales ideas among their clients.
The trading desk gets a commission from trades placed through it. Equity sales desk traders execute trade orders for clients. Often, the trading desk is divided into those that execute trades for institutional clients and those that institute trades for hedge fund clients.
Delving Into Commodities Trading Desks
Commodities can include anything from hard commodities such as crude oil, gold, and silver to soft commodities that include agricultural products such as cocoa, coffee, soybean, rice, wheat, and corn. The main difference between the two is that soft commodities have short shelf lives and hard commodities have much longer shelf lives. Investment bank commodities trading desks can be split into separate desks for hard and soft commodities, but depending on the amount of trading done by the bank, they could be further split with some banks having trading desks dedicated to a particular commodity such as crude oil.
Trading can be done by way of futures trading or spot trading. Spot trading is done when the price and delivery of the commodity take place shortly after the contract is completed. With futures trading, the price is agreed upon immediately but delivery is for a certain time in the future.
Trades are done on behalf of hedgers or speculators. Hedgers are usually large commercial concerns that want to hedge the price of a commodity they use in their businesses. For example, an airline might want to hedge the price of oil for future use, or a farmer might want to hedge the price they get for their wheat that will be available for delivery months in the future.
What Is the Federal Reserve’s Trading Desk?
The Federal Reserve Open Market Trading Desk is a trading desk for the purchase and sale of securities on behalf of the Federal Reserve Bank of New York, as part of the Reserve’s efforts to control inflation and interest rates. The Federal Reserve’s portfolio includes U.S. Treasuries, mortgage-backed securities, bank debt, and repurchase agreements.
What Is an Offshore Trading Desk?
An offshore trading desk is an area dedicated to trading in international markets and exchanges, often in commodities or depositary receipts.
What Is a Trading Desk in Advertising?
An Ad Trading Desk, or Agency Trading Desk, is a software platform or other service for buying or selling programmatic advertisements. In addition to bidding on ad space, Agency Trading Desks also monitor the results and offer audience insights, allowing advertisers to plan and optimize future campaigns.
The Bottom Line
Trading desks represent the different divisions of an investment bank, hedge fund, or other financial institution. They cover forex, fixed income, equities, and commodities, as well as more specialized investments. Since each market has distinct products and compliance and regulatory requirements for them, separate trading desks allow traders to optimize their investment strategies.
