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Dan Moczulski is a veteran of the trading industry having run buy and sell-side teams at various different brokerages over the years. This could be a mark-up in spread, commission or financing, but essentially the broker is profiting by charging more than it costs them to acquire the asset in question. In the A book, the broker acts as their name implies, as a broker to an underlying trade wanted by the client, profiting from charging a book forex brokers some kind of mark-up on the asset in question.
One of the key advantages of using an A Book broker is the transparency it offers to traders. Since https://www.xcritical.com/ A Book brokers simply pass on client orders to the market, there is no concern about the broker trading against their clients. This transparency can help build trust between the broker and the trader, creating a more conducive trading environment. In either case, understanding the different types of brokers available is crucial. Two common types of brokers in the forex industry are A Book and B Book brokers. In this comprehensive guide, we will delve into the world of A Book and B Book brokers, their roles in forex trading, and the pros and cons of each.
By the end of this guide, you’ll have a clear understanding of these brokers and be equipped to choose the right one for your trading needs. A-Book Brokers make money by increasing the spread or charging commissions on the volume of orders. Therefore, there are no conflicts of interest; they earn the same amount of money with both winning and losing traders.
They take the opposite side of their clients’ trades, which means that the broker’s profits are the clients’ losses and vice versa. This can potentially create a conflict of interest, as the broker benefits directly from client losses. While B Book brokers may introduce a potential conflict of interest due to their role as the counterparty to client trades, they also offer certain advantages.
As you can see, an A-Book broker barely makes money offering mini lots, only making about $1 per mini lot (10,000 units). There’s also an A-Book volume fee that needs to be added to the broker’s costs. It can be charged per lot, per million USD, or as a percentage of the trading volume.
Unlike an A-Book Broker, a B-Book Broker chooses to trade against their clients. There is no external liquidity pool where the Broker executes trades. Additionally, it is worth mentioning that you can see the spreads on such currency pairs tighten during regular market hours. Nevertheless, during off-market hours (such as the early Asian trading session), you will experience precisely the opposite, meaning that spreads will probably widen. In this model, prices are acquired from several market participants instead of just one Broker liquidity provider.
For example, if you trade over $100M volume per month, instead of paying $60 per $1M, you might receive a 33% discount, and your commission would be reduced to $40 per $1M. The way the broker can make money here is by charging Elsa a commission. 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.
So, the broker first pays the commission, and there arises a problem. Most of the turnover goes to the liquidity provider with a narrower spread, which is why the broker loses $5. To solve this problem, the broker adds 2-pip markup to the spread of the first liquidity provider, thereby distributing the trades between the counterparties equally.
It is important to ensure that the broker has mechanisms in place to handle client orders fairly and impartially. Another liquidity provider offers a 5-pip spread and charges a commission of $10. The broker system sorts traders’ offers automatically at the best prices for financial instruments.
Identifying a b book broker can be tricky, as many brokers do not openly advertise that they operate using this model. However, there are a few key indicators that can help traders identify whether a broker is a b book broker or not. When the retail forex broker takes the opposite of a customer’s trade, it can choose to ACCEPT the market risk or TRANSFER it to another market participant. In conclusion, there are many myths surrounding the A and B Book in forex trading.
While this might be the case, there are some advantages that a B book forex broker has to offer. Even when liquidity is low, you get a good execution of orders because your broker acts as the market maker. When a forex broker processes your trades in-house (with a dealing desk), it is a B Book.
Commissions are normally charged according to the size of your trade. Now that the risk transfer process has been explained, let’s add more details and see how A-Book brokers actually make money. The examples were shown this way to keep the focus on how the broker offloaded its market risk. Milena Moon is the head of media projects in the marketing department of the B2Broker Group.
By achieving this internal balance, the broker isn’t as dependent on client losses for revenue. Instead, they can focus on earning from spreads or other trading fees. This way, the broker’s profits and losses are not directly tied to the client’s losses and gains.
This transparent execution model ensures that traders receive fair prices and potentially faster order execution. For example, when a trader places a buy order for a specific currency pair, an A-Book broker will find the best available price from multiple liquidity providers and execute the trade at that price. On the other hand, B-Book brokers execute trades internally, which means they act as the counterparty to their clients’ trades.
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. This structure is especially lucrative considering 74-89% of retail accounts typically incur losses.
This gives the forex broker a better chance to make more profits by B booking you. You might still pay commissions and/or a mark-up on the spread, but this does not mean that your trades will go STP. With an A book broker, the forex broker does not act as your counterparty.
On the one hand, such a model encourages competition between liquidity providers, thus narrowing the spread and reducing the commission fees. On the other hand, traders do not receive the best price because of the mark-up added to the spread. Another problem is that the quality of the services offered by liquidity providers is deteriorating over time.
This means that when a client buys a particular financial instrument, the broker sells it, and vice versa. They provide the prices, bear the market risks, and manage trades using their capital. 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. A-Book brokers provide direct access to the interbank market, which means they connect traders to multiple liquidity providers, including major banks and financial institutions. This gives traders access to a wide range of liquidity and potentially better pricing.
After all, a B-Book kitchen scheme does not always mean a scam, so do not hurry to put labels. On average, a raw institutional spread on EUR/USD is around 0.1 pip and this is paid by the A-Book broker. Notice how the broker’s P&L ended up being the same regardless of whether EUR/USD went up or down. Notice how the broker sells higher to the LP than it buys from Elsa. Notice how the broker buys lower from the LP than it sells to Elsa. This is how the grocery store makes money in exchange for providing you with a service (access to food).
