Statistics say that 90% of traders lose their deposits within 6 months in forex trading.
That’s a big percentage of traders who lose money, so how are these trades processed?
And who makes the profit?
The quick answer is that no matter what market you trade, you can only access the financial markets through a broker. They connect market participants and give them access to liquidity providers.
For that purpose, there are two types of brokers, A Book broker, and B Book broker. However, almost every broker in the world is sort of a combination of A-Book and B-Book.
Well, it’s not like there are secret fraternities of A-Book brokers that walk around in white suits releasing doves into the wild and saving homeless traders from the street. Most brokers (with a small number of exceptions) are a combination of A & B-Book.
Sure, whatever. What even is A-Book and B-Book?
Ok ok. Let’s get to it.
In simple terms, the A Book model means your trade is passed through to the market and filled by what’s called a liquidity provider, which is basically a fancy term for Banks. Or, in other words, it is a non dealing desk broker that provides retail traders access to the real market where traders can trade one versus the other.
Let’s say you open a position (place an order) to buy USD/GBP. The broker sends this order to a liquidity provider (bank) ⇒ then, the liquidity provider matches the other side of the trade ⇒
TADA, your trade is executed!
This A-Book execution model is what most people understand as the role of a traditional broker. A transaction facilitator. Usually, this type of broker, which is known as STP broker or ECN broker, is able to provide a reliable connection to the forex market for any market participant with fairly competitive spreads.
In this case, the broker (and liquidity provider) will make their profits via a small mark up on the spread/commission that you directly pay when placing trading orders (A book broker typically provides variable spreads unlike B book brokers that offer fixed spreads). Therefore, the more that you trade, the more they will make. They obviously want your trading account to be active – they don’t care if you are winning or losing, all they want is that your trading volume will be as high.
Think of a real estate broker or a stockbroker. They source the deal, and in return, earn a commission.
It’s the same with A-Book brokers.
Here’s the difference – When placing a trade via a B book broker, they fill your trade internally. Forget the bank. You’re now buying directly from the supplier. So, a B book forex broker can be best described as a market maker that is responsible for always providing execution and paying the differences (losses or profits) to their clients.
Once again, let’s say you open a position (place an order) to buy USD/GBP.
The broker ‘bets against you’ and matches the other side of the trade themselves.
And that’s your trade executed! 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).
By betting against you.
They take the market risk with their own company capital.
When you win, they lose. And vice versa. They need losing traders more than they need profitable clients.
I know what you’re thinking…
How can this possibly be legal?!
I was as shocked as you when I first learned how the inner workings of the brokerage industry operate. But believe it or not, it’s completely legal. I have even been told the regulators actually encourage the practice because it results in clients’ trades executing at a better price (due to the order being filled instantly).
All (A-Book and B-Book) regulated Forex brokers possess what’s known as a “market maker license”. Whether the broker is regulated by ASIC, FCA, or the NFA, it’s the same. They have the option to fill the trades internally (B-Book model) or pass them through to the market (A-Book). If the broker chooses to keep their clients’ order internally by using the B book execution model, they need to pay for the winning trades of their clients but they also make a profit when a trader is losing money.
If you put the morality aside of forex brokers pretending to be white knights who hunt down the best liquidity pool in the world to deliver you spreads of 0.0 and instead accept the fact that price is the only thing that matters, it doesn’t.
Personally, I don’t like the idea of the broker betting against me. If I lose, the broker wins and if the broker loses, I win.
Mimic how professionals trade. Discover your inner talent. Learn everything you need to know about trading the markets from beginner level to the most advanced, helping you to create critical skills and techniques to you can apply in your trading right away.
Mimic how professionals trade. Discover your inner talent.
Learn everything you need to know about trading the markets from beginner level to the most advanced, helping you to create critical skills and techniques to you can apply in your trading right away.
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