A Book Brokers vs B Book Brokers

Statistics say that 90% of traders lose their deposits within 6 months. 

That’s a big percentage, 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 market through a broker.

There are two types of brokers, A-Book and B-Book. 

However, almost every broker in the world is a combination of A-Book and B-Book.

It’s not like there’s 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.

What are A-Book brokers?

A-Book 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.

How do A-Book brokers process the trades?

Let’s say you open a position (place an order) to buy USD/GBP.

The broker sends this order to a liquidity provider (bank) ⇒

The liquidity provider matches the other side of the trade ⇒


TADA, your trade is executed!

This A-Book transaction is what most people understand as the role of a traditional broker. A transaction facilitator. 

How does the A-Book Broker make profit?

The broker (and liquidity provider) will make their profits via a small mark up on the spread/commission that you directly pay when placing an order. Therefore the more that you trade, the more they will make.

Think of a real estate broker or a stock broker. They source the deal, and in return, earn a commission.

It’s the same with A-Book brokers. 

What are B-Book brokers?

When placing a trade on the brokers B-Book, they fill your trade internally. 

Forget the bank. You’re now buying directly from the supplier.

How do B-Book brokers process the trades?

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!

How does the B-Book Broker make profit?

By betting against you.

Yes, really.

They take the risk with their own company capital. 

When you win, they lose. And vice versa.

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).

Here’s how they get away with it. 

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) or pass them through to the market (A-Book).

brokers

How does this affect you? 

If you put the morality aside of brokers pretending to be white knights who hunt down the best liquidity 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. 

I want my, and my broker’s motivations to be aligned.

But in all honesty, we’ll most likely never even know which book we’re on.