This model provides traders with fair and transparent trading conditions, as their orders are executed directly in the market, leading to potentially tighter spreads and faster execution speeds. The B-Book is a trading execution method where brokers act as the counterparty to their clients’ trades. In this model, brokers do not forward clients’ orders directly to external liquidity providers or the market; instead, they internally match client orders and take the opposite position. This means that when a client buys a particular financial instrument, the broker sells it, and vice versa. A-Book brokers, also known as Straight-Through Processing (STP) brokers, work differently compared to other brokers. They don’t trade against you as some other types of brokers do.
This is the reason why most brokers use a combination of B-Book and A-Book execution, also known as a “hybrid model”. If their customers win big enough, the losses for the broker could be enough to put the broker out of business. With such a high percentage of new traders blowing their accounts, and the universe of new traders being finite, it is questionable if a strictly A-Book approach is sustainable in the long term.
A large number of similarly sized customers.
It is an intermediary between a client and a service producer, to make it simple. The term ‘broker’ is used in various spheres, such as in real estate, insurance, mortgage, etc. However, we mostly hear this word when talking about finances and trading on the financial markets. With the use of computer algorithms, brokers are able to analyze trading patterns to profile the trades of each customer.
- You might have heard the terms “dealing desk broker” and “no-dealing desk broker.” These terms refer to the execution of trades.
- Brokers devised a hybrid model in order to overcome the limitations of the A-Book and B-Book methods.
- Let’s see a trade example of how a broker would offload its risk.
That said, the B-Book model is considered challenging in terms of risk management. Especially, if you have lots of customers who open positions in the same direction and trade profitably. Most new retail traders have no trading experience and it’s not uncommon for 80-90% of them to lose their entire deposit within 12 months.
A-Book Vs B-Book Brokers
However, brokers don’t have just one customer, they have many. An intermediate comparative analysis for three major NDD models (I will not include DD and B-Book models without passing orders to the external market) is presented in the table below. There were numerous cases of bankruptcy after the SNB unpegged the franc from the euro.
This categorization involves a set of criteria that helps the broker determine the most appropriate risk management strategy for each trader. In a pure B-Book model, brokers can mitigate counterparty risks by internally offsetting trades among their clients. This involves matching a client’s trade with another client’s opposing trade. By doing this, the broker can neutralize the market risk to some extent without needing to hedge externally. The second significant income source for B-Book brokers is the losses of their traders. Since a substantial percentage of retail Forex traders, between 74% and 89%, tend to lose money in the long run, these losses become the broker’s gains.
Are B-Book brokers legal?
You might have come across forex brokers who call themselves, STP broker, or an ECN broker or a non-dealing desk broker. When a broker uses the A-Book business model, all of its clients’ orders are transmitted directly to the forex liquidity provider, who in turn routes them to the interbank market. If the client makes money, the broker loses it, and vice versa.
Milena Moon is the head of media projects in the marketing department of the B2Broker Group. Milena’s career began in 2018 as a freelance social media journalist. Milena also has experience and education in the TV industry, which help other B2Broker projects thrive. The first thing to check is its reputation — trustworthy brokers always highlight their reliability by partnering with large companies, brands, or sports clubs. Eventually, they become too big and risky for the broker that their orders have to be hedged (A-Booked). The broker would just constantly make money from the spread (and overnight financing charges) and not have to worry about going bust.
1. Order processing model NDD + STP (Straight Through Processing)
Think of the A-Book broker as a facilitator, connecting you to the wider forex market. Investing, Derivatives, Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. Between 68-89% of retail investor accounts lose money when trading CFDs and spread bets.
Even though FBS is a Forex broker, it offers lots of other trading instruments, like metals, energies, and indices. Some decades ago, a broker was a personal advisor who would share his opinion about what to buy and sell according to the situation on the market. With so many unprofitable Trading Api traders, a B-Book model provides an additional source of revenue. When not all of the positions are able to be hedged, the excess market risk exposure is then hedged externally. This causes traders to be concerned about shady behavior from brokers who don’t want their customers winning.
In some cases, brokers can also add an additional mark up on the prices to make an extra buck. Seasoned copywriter with a focused expertise in crypto and fintech, adept at translating complex industry jargon into clear, engaging content. Driven by my mission to illuminate the intricacies of the crypto and fintech industries, my commitment is to create and deliver content that educates, engages, and empowers. I strive to foster understanding, inspire confidence, and catalyze growth in these dynamic sectors, contributing to the forward momentum of our digital financial future. Brokers appeared with the emergence of the stock exchange, the place where buying and selling of securities occurs. From the origins to modern understanding, exchange funds have passed a long stage of evolution and modernization, changing the principles of operation and covering all large economic and financial processes.
The profits of the trader are equivalent to the losses of the broker. Both traders and brokers have disadvantages when using the A-Book approach. As a result, the A-Book broker is compelled to raise the mark-up on the spread in order to cover its overhead expenses. Have you ever had to deal with the forex A-book/B-book models when studying the brokerage industry?
How B-Book Brokers Earn Money
That means you will pay the difference between the purchase and sell price. In spite of the difference in work of the different kinds of brokers, they all have some similarities, like a fee for their service and online platforms for clients to perform their trades. One needs a broker when they want to trade in the market or invest in stocks because a person cannot go to a security exchange without an intermediary. Therefore, transactions can only be concluded by legal entities that have a license — banks, investment and brokerage companies.
These models transfer the client orders to the interbank forex market in entirely different ways. This article deals with different types of order processing models. I will explain A-Book and B-Book models, the difference between them, and why the B-Book is not always bad.