The Different Trading Desks of an Investment Bank

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The Different Trading Desks of an Investment Bank

A trading desk is a department of an investment bank. Trading desks are likely to be segregated by market, depending on the investment bank. Foreign exchange, fixed income, stocks, and commodities are the four major sectors.

Each of these sectors may be split further. For example, fixed income is a wide category that includes anything from ultra-safe US Treasury bonds to ultra-risky, low-grade business bonds known as junk bonds. Larger investment banks may split their trading desks into specific groups within these broad areas.

Key Takeaways

  • A trading desk is a section of a bank, investment business, or trading floor that is specialized to the selling and acquisition of certain items.
  • Many financial organizations have distinct trading desks for FX, fixed income, commodities, and stocks. Some institutions may subdivide the various marketplaces even more.
  • In order to calm the markets, the Federal Reserve also operates a trading department that trades securities.
  • Because the global forex market is far bigger than the stocks or commodities markets, foreign exchange, or forex, desks are the most prevalent trading desks.
  • Trading desks should not be confused with Agency Trading Desks, which are used to purchase audience access for commercials.

Benefits of Trading Desks

Investment businesses might use specialized trading desks to segregate various types of assets and marketplaces, many of which operate under distinct laws and need different certifications. Commodity traders, for example, must be certified and registered by both the National Futures Association and the CFTC, while stock traders have their own test and licensing requirements. The separation of the stocks and commodities desks enables both assets to be traded with little friction amongst traders.

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Forex Trading Desk

Every major investment bank has a currency trading desk. The forex market is the world’s biggest, dwarfing stocks and fixed income. The Bank for International Settlements (BIS) estimates that FX trade is worth $6.6 trillion per day on average.

The vast majority of this trading is conducted by institutional investors such as investment banks. Traders are driven to forex trading because it is very liquid, allowing them to take on huge amounts and easily enter and exit trading positions.

Currency pairings are used to quote forex contracts. Traders, for example, wager on whether the dollar will climb or decrease against the yen (USD/JPY). The US dollar is the most actively traded currency, accounting for around 88% of total forex trading activity; the euro is second, followed by the Japanese yen. Traders on a forex trading desk often trade in a foreign currency contract’s spot exchange rate.

Tip

Because the foreign currency market is the biggest worldwide market, almost every bank has a forex trading desk.

Fixed-Income Trading Desk

Fixed income refers to anything with an income stream, such as government bonds such as US Treasuries or corporate bonds. Credit default swaps (CDS) are derivatives that protect against a corporate bond or sovereign debt issuer’s default and may be traded on fixed-income trading desks.

An investment bank may divide its fixed-income trading desks so that the derivatives desk dealing in CDS is distinct from the trading desk dealing in lower-risk US Treasury bonds, or the desk dealing in riskier corporate low-grade bonds, also known as junk bonds, is distinct from the desk dealing in higher-grade corporate bonds.

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Debt issued by industrialized nations may also be traded on a separate desk from sovereign debt issued by underdeveloped countries.

Equities

An investment bank’s equity trading desk may handle anything from equities sales and trading to equity derivatives and exotic options trading. Equity trading desk sell-side traders utilize information from research analysts’ reports to develop sales ideas among their customers.

The trading desk is compensated for deals executed via it. Client trading orders are executed by equity sales desk traders. The trading desk is sometimes separated into two sections: those who execute deals for institutional customers and those that initiate trades for hedge fund clients.

Commodities

Commodities may range from hard commodities like crude oil, gold, and silver to soft commodities like cocoa, coffee, soybeans, rice, wheat, and maize. The major distinction between the two is that soft goods have very limited shelf life whereas hard commodities have much longer shelf lives. Investment bank commodities trading desks may be divided into hard and soft commodities trading desks, however depending on the amount of trading done by the bank, they can be further divided, with some banks having trading desks specialized to a certain commodity such as crude oil.

Trading may be done via futures or spot trading. Spot trading occurs when the pricing and delivery of a commodity occur immediately after the transaction is concluded. With futures trading, the price is agreed upon immediately, but delivery is scheduled for a later date.

Hedgers or speculators make trades on their behalf. Hedgers are often huge commercial entities who desire to hedge the price of a commodity that they utilize in their operations. For example, an airline may choose to hedge the price of oil for future usage, or a farmer may wish to hedge the price of wheat that will be ready for delivery months in the future.

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The Bottom Line

Trading desks represent several sections of a bank, hedge fund, or other financial firm. Separate trading desks enable traders to optimize their investing methods since each market has unique goods and criteria.

Trading Desk FAQs

What Is the Federal Reserve’s Trading Desk?

The Federal Reserve Open Market Trading Desk is a trading desk that purchases and sells assets on behalf of the Federal Reserve Bank of New York in order to regulate inflation and interest rates. The Federal Reserve’s current portfolio consists of US Treasuries, mortgage-backed securities, bank debt, and repurchase agreements.

What Is an Offshore Trading Desk?

An offshore trading desk is a section of a company that specializes in trading in foreign markets and exchanges, often in commodities or depositary receipts.

What Is a Trading Desk in Advertising?

An Ad Trading Desk, also known as an Agency Trading Desk, is a software platform or other service that allows you to purchase or sell programmatic adverts. Agency Trading Desks, in addition to bidding on ad space, monitor performance and provide audience analytics, helping marketers to plan and optimize future campaigns.

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