A-Book vs B-Book Brokers: Who Are They And How Make Money?

This can potentially create a conflict of interest, as the broker benefits directly from client losses. An A-Book Forex broker generates revenue by charging commissions on trades or applying a spread markup. A B-Book Forex broker primarily earns through the spread on trades and profits from client losses. In this model, the broker always acts as a counterparty to trades, meaning when a trader loses, the broker profits.

a book broker meaning

As you read above, both these books have their own pros and cons. Ultimately, it is up to you to decide what type of a forex broker you would want to trade with. Regardless of whether it is an A book or a B book execution, you cannot avoid costs such as spreads, commissions and overnight swaps. But if you are in a timezone such as the European trading session which is very active, trading with an A book broker is more ideal. This is because you are most likely to get the best possible spreads due to higher liquidity.

B-Book Order Execution Example #1: Broker Wins

While A book brokers are usually preferred, there are some downsides to this as well. Because your orders are processed directly to the liquidity pool, you will witness variable spreads. The spreads can be very tight when liquidity is high but during low volume periods, the spreads can vary significantly. Market data shows that at least 70% of retail clients lose money, which is the official information that every regulated FX broker must provide when promoting their services. In addition, when clients lose their money, they leave, so the broker has to constantly bring in new ones to keep his business going, which can also be a challenge. A full-service broker is a financial advisor who checks the financial markets and gives you advice on buying or selling.

a book broker meaning

In this case, there is no conflict of interest between the company and the client because the broker will receive the profit no matter whether the trader gains or loses in the market. But, certainly, the company is interested, first of all, in profitable traders because, in this case, a mutually advantageous collaboration between the company and the client will be long-term. Addressing the limitations of the A-Book and B-Book models, the hybrid model emerged, favored by many established brokers. In this approach, the broker handles smaller transactions internally, while more substantial ones are routed to liquidity providers
and subsequently to the interbank.

What is an A-Book broker?

Brokers employ two distinct operational technologies – the A-Book and B-Book models. Both cater to how client orders are interfaced with the market, each with its unique pros and cons. What’s the difference between an A-Book Broker and a B-Book Broker? It is also known as an STP (Straight Through Processing) Broker or a Non-Dealing Desk Broker. Ultimately, the choice between A-Book brokers and B-Book brokers depends on your individual trading preferences, goals, and risk tolerance. A B book operator can offer liquidity when there is none, whereas an A book operator needs to be able to secure the underlying asset.

a book broker meaning

Once a suitable match is found, your trade is executed, ensuring that you become an active participant in the broader market environment. The success and integrity of this model significantly rely on the sophistication and fairness of the broker’s software and their commitment to providing a balanced trading ecosystem. Some people will say that this execution model generates conflicts between the client and the broker. However, there are some advantages to trading via B-Book brokers. This includes very competitive spreads (sometimes as low as zero), fast execution, and the ability to get an execution on all instruments (including exotic currency pairs). Forex brokers categorize traders into A-book or B-book models primarily based on their trading profile and behaviour.

A-Book Forex Broker Model Explained

With an A book broker, the forex broker does not act as your counterparty. For many traders, this is what matters the most – to be able to trade with a broker that does not have a conflict of interest when processing your orders. And it is in your best interest to understand how the trades are processed. You might have heard the terms “dealing desk broker” and “no-dealing desk broker.” These terms refer to the execution of trades. Whichever model you work with, be it A-book or B-book broker, each has its advantages and disadvantages both for the broker and the traders.

  • Instead, they can focus on earning from spreads or other trading fees.
  • With so many unprofitable traders, a B-Book model provides an additional source of revenue.
  • They do not take many risks but potentially achieve lower profits because they earn only on margins/commissions.
  • Alexander Shishkanov has several years of experience in the crypto and fintech industry and is passionate about exploring blockchain technology.

That’s why they’re called market maker brokers or dealing desk brokers. They balance their books by hoping that losing trades will cover the winning trades they must pay out. This model is somewhat similar to the one used by betting companies, i.e., the liquidity provider/supplier is the broker himself. Applying this, the Forex broker earns only on losing traders’ positions. Accordingly, any profit of the client will be a loss for the company.

The “Hybrid Model” Used By Forex Brokers

Compared with the volumes of interbank transactions, the internal volumes on the broker’s platform are too small. That is, the A-Book broker can’t compete with the B-Book one in terms of costs. Traders, in turn, do not really understand all these models, preferring more favorable conditions, thereby encouraging the activity of such kitchens.

a book broker meaning

Many USA brokers are Dealing Desk type (B-book),
This is due to strict regulatory policies above them. Offshore companies, in comparison, are much freer in choosing a Hybrid model or exploring a clean A-book practice. Again, this is due to less strict policies + liquidity providers pool they are able to work with. To successfully identify profitable and unprofitable investors, Forex Brokers have software that analyzes their clients’ orders. For example, they can filter traders by the amount of their deposit, the leverage used, the risk taken with each transaction, and the use or non-use of protective stops.

How do A-Book Forex brokers make money?

ECN/STP brokers are the brokers that combine both models without prioritization, focusing on the speed of finding a matching trade. The ECN model provides equal rights for all traders and liquidity providers. In the STP model, the conditions were largely imposed to the trader by a particular provider. The ECN is a kind of platform where everyone places Bid/Ask orders that affect the market liquidity. A-Book brokers, also known as Straight-Through Processing (STP) brokers, operate by directly routing traders’ orders to the market without any intervention or conflict of interest. These brokers act as intermediaries, connecting traders to liquidity providers such as banks, financial institutions, and other traders.

a book broker meaning

When your broker receives an order from you (the customer), the broker will enter into a separate trade with a liquidity provider in the same direction as you. A-Book means your trade is passed through to the market and filled by a “liquidity provider”, basically a fancy term for “Bank”. Imagine you want to buy some USDJPY, your broker places the order with the bank, the bank then digs into their vault and fills your order.

Brokers accept their clients’ trades and automatically send them to the liquidity provider. A-book brokers earn independently of market movements, profiting from commissions and spreads, also shared between the liquidity provider and the trading platform. For example, when a trader places a International Commerce Erp buy order on a currency pair, the A-Book broker will execute the order by finding a matching sell order from another participant in the market. The broker does not take the opposite side of the trade, eliminating the potential conflict where the broker would profit from the trader’s losses.

The functioning of Forex brokers, or rather Forex dealers, is well documented in Forex trading regulations all around the world. Forex regulatory bodies in various countries oversee these brokers to ensure fair practices. They are often required to maintain transparency, provide fair trading conditions, and protect clients’ funds. So, while both models involve the broker acting as the counterparty to the client, the fundamental difference lies in how they manage the resulting exposure and potential conflict of interest. B-Book brokers retain the risk, while A-Book brokers transfer it. With spread markup instead, the broker adds a small extra charge to the spread, the difference between the buy and sell prices.