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What is Forex Dealing desk and how does it work?

Any transaction in the FOREX market occurs invariably through a broker. Brokers offer a very valuable service in that they enable even the smallest investor to have access to the FOREX market, which, until very recently, was a very exclusive club. There are basically two types of brokers offering their services at the retail level: the traditional broker with dealing desk (known as the Market maker) and non-dealing desk broker (operating an electronic platform).

The market maker is the counterpart to an individual trader in a FOREX transaction. In other words, if the individual trader is looking to sell a certain amount of a currency at a certain price, the market maker will try to meet this price and quantity. He can do this by matching his other clients' orders with the individual trader's requirements. He can split the order and do any number of combinations to satisfy the client. Alternatively, he may buy the trader's currency himself. These calculations are done by what is called a dealing desk.

A dealing desk is therefore essentially a group of traders working for the broker who analyse every client's orders, match the orders in an attempt to satisfy them or make the relevant purchases. These analyses are however always based on the bottom line of the broker. In other words, the broker's profit objectives come first; the client comes second. If the client's order is against the broker's interests, orders may not be met, prices may be reduced or transactions delayed. The ostensible goal of the dealing desk is to provide liquidity because they enable instantaneous trade executions. They do the pricing, by matching the quotes of one client with the other clients they have or by determining their own interests in the client's order. Their revenue is not from commissions on each trade. Rather, they make a profit on the spread between the bid and ask price. They offer a fixed spread, which can sometimes be beneficial to the trader when the market is volatile.

The dealing desk therefore acts as a screen between the real market and the trader. The client never gets the real quotes or quantities on offer. They receive the manipulated image that the broker wants to show them. In all circumstances, the Market Maker loses money if the client makes a profit. This is because he is the counterpart to the transaction. You can therefore be certain that the Market maker will not allow you to make exorbitant gains because these will mean exorbitant losses for him. The only thing preventing the Market Maker from fleecing the trader dry is the question of reputation. If the reputation of the brokerage is marred, that is most certainly the end of his business.