A-Book vs. B-Book Forex Brokers: Should You Care How Your Broker Handles Trades?

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A-Book vs. B-Book Forex Brokers: Does It Matter Which One You Choose?

A-Book vs. B-Book Forex Brokers: Should You Care How Your Broker Handles Trades?

If you’re trading forex, you’ve probably come across the terms A-book broker and B-book broker. These refer to two fundamentally different ways brokers handle your trades.

Any forex broker can put up a fancy website and look like a reputable, top tier business. However, it takes some digging to uncover its business model. Is it an A-book, B-book or hybrid A/B-book model? Either way, should it matter to you should it matter to you if your broker operates an  A-book or B-book?

In this article, we’ll explain the difference between these two broker models and help you decide whether it should influence your choice of broker.

What Is an A-Book Broker in Forex?

An A-book forex broker is one that passes your trades directly to the market. This means your orders are routed to liquidity providers such as banks, hedge funds, or other large financial institutions. Your interest should be how your broker treats your trades, not what a liquidity provider does with them.

Key Features of a forex A-Book Brokers:

• There is no conflict of interest: The broker doesn’t win if you lose.
• Pricing is based on market-liquidity and spreads.
• Makes its money from spreads and commissions, and total trading volume

Since the broker is not taking the other side of your trade, there is a greater incentive to see you succeed and continue trading.

What Is a B-Book Broker in Forex?

A B-book forex broker takes the other side of your trade and adds it into its “book.” Rather than passing it directly to a liquidity provider. Brokers view it as your losses are its gains and vice versa. However, in reality, your trades are part of a larger book of trades and it is up to the broker to employ a risk management and hedging strategy to limit is exposure and maximize its profits.

I recall in the early days of online forex trading most brokers ran a pure B-book.  The CEO of a top broker told me that its business model was based on the premise that most retail traders lose money. For that reason, it was rare for it to pass any trades into the market.  There were days, usually once a month, where one way moves resulted in a big loss. As he explained, this was a cost of doing business but the profits it made other days more than made up for it.

On another occasion, again in the early days, I visited a top broker and peaked into its dealing room. I expected to see something that looked like a bank dealing room. I was shocked to see only on e person in it. It was only afterwards that I learned that there was no need for dealers as all trades went into a B-book.

Key Features of a forex B-Book Brokers:

• Makes its profit from traders losing money as it takes the other side of trades.
• Executed trades are never passed to the real market.
• May use incentives to attract traders as it expects most to lose..

As online forex trading has evolved so have brokers. Many brokers today use a hybrid A/B-book model, where they identify profitable and/or large volume/size traders’ and funnel their trades to the A-book to lijit risk and keep smaller volume/size trades from less experienced traders in the B-book.

A-Book vs. B-Book: Should It Matter to You as a Trader?

1. Conflict of Interest

The biggest concern with B-book brokers is a conflict of interest. This means the broker and trader do not have a common interest. Can a broker say it is on your side if it profits from your losing trades? This is not to say that all B-book brokers are dishonest but suggests there are more  incentives to tilt the field away f=rather than in favor of the trader.

2. Trade Execution Quality

Because there is no centralized clearing system in forex, there is no way to trade with one broker and clear the trade with another. This means a trader is totally dependent on the broker for executing trades. As a result, a B-book broker has full control over order fills, slippage, and stop-loss executions giving them the less reputable ones an opportunity to manipulate prices or trigger stops unfairly.

3. Broker Solvency Risk

Here is where due diligence comes in. As noted earlier, any forex broker can put up a fancy looking website and come across as a top tier firm. It is like buying a used car. You should not be swayed by a fancy outside. You need to look under the hood.

For a smaller B-book broker or one that takes on too much risk, one surprise headline could threaten its finances. This is why it’s important to trade with a reputable well-capitalized broker that has a large volume of trades and doe3sn’t need to manipulate pricing or squeeze you  to boost its profits..

Just a word of warning. It may be rare but there have been times where extraordinary events have shaken the core of the online trading business, not sparing any broker, no matter whether it opeartes a an A-book, B-book or A/B hybrid book.  Read about Flash Crash 2015!

A-Book vs. B-Book—What Should You Do?

Both models have pros and cons. The quality and reputation may be more important than whether it runs an A-Book or A/B Hybrid Book.  In other words, it is hard enough to make money trading that you should not have to worry about the solvency of your broker. A reputable B-book broker with strong oversight (e.g. regulation) may be safer than a less reputable (or unregulated) A-book broker.

Go into trading with your eyes wide open. As a trader all you want is a level trading field no matter what type of model your broker uses. All a trader can ask for is consistency in terms of pricing, spreads, stops and trade executions. So, while the type of broker model should matter, what counts the most is how you are treated you as a trader and whether you have a fair opportunity  to make money trading.

 

 

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