The hybrid Model
Most brokers these days operate within a hybrid model. What does this mean I hear you ask? Well, it’s a great question to ask! The larger trades are passed on to the market. The smaller ones are fulfilled internally. The reason for this is to manage the risk. If someone is trading worth 10 million, a 10% move can result in a 1 million loss for the broker and a similar profit for the client. Most brokers aren’t willing to take this risk. That is why; the large orders are passed on to the market.
On the other hand, if you trade worth $ 20,000, most brokers will find that risk acceptable and warehouse those orders on their book (not passing the order onto a liquidity provider and handling that position internally) and thus fulfilling the order internally. These days you’ll find many brokers operating this way. There are, however, a few key differences between brokers who operate on a specific model. We’ll cover these differences below. A Book vs B Book brokers differences: If a broker exclusively operates on a specific model, it is easy to notice a few differences.
An A-book broker can provide you with access to unlimited liquidity. That’s because it’s often connected to a larger bank operating with billions of orders at any one time. That is why it can fulfil a pretty large order reasonably quickly. B BOOK brokers can fulfil a small order quite quickly. However, for the larger ones, it might need more time. These brokers have a distinct advantage as well. If you want to trade in an instrument where volumes are low, B’s can provide you with liquidity from its balance sheet. Most banks have a fairly large volume when it comes to well-known Forex currency pairs. Not so much for the lesser-known ones. On the other hand, a broker might have these lesser-known currency pairs on its balance sheet since it only provides a trading platform. Thus, if your broker is fulfilling orders worth millions of dollars in no time, it is likely to be A book broker.
While choosing a forex broker, you would of course, want your broker to be entirely transparent. However, B books can’t afford to be. Essentially, an A-book broker makes money from providing you with an average, facilitating the trade and the spread between the buy and sell price. It means that whether you make money or lose money, it does not make any difference to the A book broker. A book broker still makes money when your transaction is executed because they make the spread regardless of you making money or losing money.
Since the B Book broker fulfils the transaction, the broker essentially takes a trade against your trade. Only when you lose money, the broker will be able to make money. It is not doing so consciously, but it‘s on the other side of your trade because it is fulfilling your order from its balance sheet. That’s why you’ll find that B Book brokers disclose that they will fulfil the transaction internally. In terms of transparency, generally speaking, A book brokers are much more transparent regarding the trading costs and the kind of liquidity they have on offer.
This is where the B Book broker has an advantage. A book broker has to make money for themselves as well as for the bank. There are two intermediaries involved when you’re trading through A book broker. The same is not true for a B Book broker. The B Book broker fulfils the transaction themselves. That’s why; there is only one intermediary involved. When it comes to trading costs, the B Book brokers are affordable. These are the three key differences between A book and B Book brokers. Want to test which category your broker falls on? Worry not! I’ll share with you a simple test which you can perform for the same. How to test your broker?
Usually speaking there is immense volatility in the forex markets during a news release. Due to this volatility, the volume spikes, and the liquidity often dries up. It is challenging for the A book brokers to find the bank that fulfils the transaction at such a time. That’s why; the amount of time that the A book brokers require in such instances to fulfil the transaction is comparatively higher. On the other hand, even during such times, most B Book brokers will fulfil the transaction almost instantly. This is what you’ll be using for testing. You have to place a trade right after the news release. The time which your broker takes to fulfil that trade will let you know whether you’re dealing with the A book broker or not.
Up until now, you have been using an EA, specifically, one which trades on the news release, and the broker is fulfilling those transactions fairly quickly, then you’re likely trading with the B Book broker. What happens after you place an order with an A-book broker on mt4? What happens when you place an order with an A-book broker on MT4? Most traders today use MT4 for placing their trades. That is why you would, of course, question what happens with either of these brokers when you trade using MT4. When you punch in order on MT4 with an A book broker, the front end looks precisely the same as punching in an order with a B Book broker. However, in the backend, the A book broker will pass on the order to its bank for fulfilment.
While this process is blazing fast due to technology, it still means that the order will be fulfilled after a few seconds, if not longer. That is why the order execution prompt which you get on MT4 will take a bit longer. What happens when you place an order with a B-book broker on MT4? When you place an order with the B Book broker on MT4, it is fulfilled almost instantly. That’s because, on the back end, the broker accesses its inventory and fulfils the order. Inventory means that the broker has hundreds if not, thousands of orders on its books, and its #1 goal is to be “net-zero”) in the market. “Net-zero” means that the broker might have more long orders than short orders, so, therefore, the broker needs more short orders to match the number of long orders they have (hypothetically, all the orders are the same lot size), making the total number of all orders equal.
An A Book Broker will want you to make money strictly so the broker/client relationship continues well into the future. This is because as mentioned above, the A book broker makes their money from the spread and sometimes commissions, for providing you with an ECN (electronic communication network) style broker service allowing you to access the markets. What happens when you profit from either of these brokers? This is where things get interesting! If you profit with the A book broker, the transaction facilitated means the liquidity provider takes the loss and pays you. Their loss is your profit. The broker in itself does not incur any loss since the broker is dependent on transaction charges, spread, and financing charges.
An A Book Broker on the other hand, when you profit with a B Book broker, the B Book broker makes a loss. It means that your profit is the broker’s loss. That’s why mentioned earlier, don’t be surprised if you are retrenched by your broker. At least you’ll know for certain that your brokers are a B book! On smaller trades, this conflict of interest isn’t an issue. However, if you’re planning to trade very large amounts (retail traders’ definition of a large or significant amount is vastly less than what a professional an institution like a liquidity provider considers a large amount), it is a good idea to go with an A book broker or a very large B Book one. However, my personal view regardless of the discussion is to always go with an A-book broker.
In addition to scammers, even though very rare, are cases where the broker returns your original capital, closes your account, and retrenches you. Your account is essentially returned to pre-trading days, your withdrawals are denied and that’s a whole new conversation. Note! If a client has launched a legal dispute with a broker, by law, these cases are listed publicly and clients can do their diligence and come to their own conclusion whether they would like to take the risk of trading with a broker who is in a legal dispute with a client for any reason, but mostly all of the time is regarding profits not Payed.
The industry is a lot better now in the 2021’s than it was in the 2010s. Take my word for it! I have not personally experienced this although I am very well aware of traders it has happened to. This style of behaviour is a replica of B book behaviour. Thus, while trading forex and looking for the best FX trading brokers, instead of looking at the spread or the commissions, you have to figure out whether the broker is A book broker or a B Book one and, after that, choose one.
The guide above can help you understand what it all means and how to detect the broker type. Inventory means that the broker has hundreds, if not, thousands of orders on its books, and its #1 goal is to be net-zero) in the market. This means that the broker might have more long orders than short orders so there for the broker needs more short orders to match the number of long orders they have making the total number of all orders, and lots are equal to each other. A book broker will want you to make money strictly so the broker/client relationship continues well into the future. This is because as mentioned above, the A book broker makes their money from the spread and sometimes commissions, for providing you with an ECN (electronic communication network) style broker service allowing you to access the markets.