A-book and a B-book forex broker. What's the difference?
Forex trading is different from investing in stocks or futures, because a broker can choose the type of trading with his clients. This system used by the Marketplace is called “B Reservation”.
No Dealing Desk ECN / STP brokers send all transactions of their clients to the real market or to liquidity providers. Therefore, they use the Reservation system.
However, many forex brokers use a hybrid model that uses the B-book for customers who are losing money and A book for profitable customers.
In the regulated futures contract and on the stock markets, all transactions are sent to the exchange, which opposes the orders of buyers and sellers, sorting them by price and time of arrival.
Book A - Used by ECN / STP forex brokers
ECN / STP brokers use A book, they are intermediaries who send trading orders of their clients directly to liquidity providers or multilateral trading facilities (MTF). These forex brokers make money by increasing the spread or by charging commission for the volume of orders. Therefore, there is no conflict of interest; these brokers earn the same money with both winning and losing traders.
This type of forex broker is becoming increasingly popular because forex traders are confident in the absence of this conflict of interest, as well as the fact that these brokers have an incentive to have profitable traders, as they increase their trading volumes, and therefore brokers, profit.
Book B - Used by Market Maker Brokers.
Forex brokers who use the B-book, support the internal orders of their customers. They occupy the other side of the transactions of their clients, which means that brokers' profit is often equal to the loss of their customers. Brokerage firms can manage the risks associated with holding the B-book using specific risk management strategies: internal hedging by matching opposite orders submitted by other customers, changing the difference, etc. Since most retailers lose money, using Book B is very beneficial for brokers.
Obviously, this model generates conflicts of interest between brokers and their clients. Profitable traders can cause these brokers to lose money. Traders often worry that they are subject to the disguised tactics of some brokers who strive to always be profitable. This is why larger forex brokers use a hybrid model that involves placing deals in book or book B based on traders' profiles.
The popularity of the hybrid model is understandable, because it allows forex brokers to increase their profitability, as well as their trust. It also allows brokers to earn money from profitable traders by sending their trading orders to liquidity providers.
To effectively identify profitable traders, as well as unprofitable, forex brokers have software that analyzes the orders of their customers. They can filter traders depending on the size of their deposit (the percentage of winning traders increases significantly for deposits of more than 10,000 US dollars), the leverage used, the risk received from each transaction, the use or non-use of protective stops, etc.
The hybrid model is not necessarily bad for traders, because the profit received from traders who are placed in the B-book allows hybrid brokers to provide all their clients with very competitive spreads, whether they are profitable or not. The main disadvantage of this system is that if the hybrid broker does not understand the risk of the B-book, he can lose money and, therefore, endanger the company.
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