In this article
- What is the A-Book Broker Model?
- What is the B-Book Broker Model?
- Advantages and Disadvantages of A-Book and B-Book Broker Models
- A-Book Broker Model Advantages
- For Brokers
- For Traders
- A-Book Broker Model Disadvantages
- For Brokers
- For Traders
- B-Book Broker Model Advantages
- For Brokers
- For Traders
- B-Book Broker Model Disadvantages
- For Brokers
- For Traders
- Profitability of A-Book vs. B-Book Broker Models
Milena Moon is the head of media projects in the marketing department of the B2Broker Group. Milena's career began in 2018 as a freelance social media journalist. Since then, she has sought out and written about the latest crypto trends, from news in the sector to educational articles that help newcomers immerse themselves in the crypto industry in the easiest way possible. Milena also has experience and education in the TV industry, which help other B2Broker projects thrive.
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.
The term “broker” appeared as a definition of intermediaries’ activity between a seller and a buyer, in the modern understanding — between an insurer and an insurant. A broker can be considered a trade representative, a legal person who participates professionally in the capital market and has the right to make transactions and operations on behalf of his client. The income from this kind of activity is called a commission. There are three models of brokers: A-book, B-book, and hybrid.
This article will tell you what A-book & B-book brokers models are all about. In addition, you will learn what advantages and disadvantages they have, as well as how they make money.
What is the A-Book Broker Model?
So, what is an A-book broker? This is a market operating model used by ECN/STP brokers. They are intermediaries who send their clients’ trade orders directly to liquidity providers or multilateral trading centers (MTFs). In this model, brokers make money by increasing the spread or collecting a commission on the transaction volume. Consequently, there is no conflict of interest because brokers make the same amount of money for both winning and losing traders.
It is because there is no conflict of interest that this model is gaining popularity. In addition, traders know that such brokers are interested in having profitable traders because they increase these brokers’ turnover and, therefore, profits.
Brokers working on the A-book model are less risky but also potentially less profitable because they earn only on margin and commissions. This model is recommended for novice brokers who are just gaining experience in the Forex industry.
The working principle of such brokers is quite simple. 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.
The spread is the difference between the buy and sell price, calculated in pips. Thus, when a client buys a currency, the broker offers him the “spread.” If the spread is X pips, the client automatically loses X pips when buying. A-book brokers should focus on the number of trades because each trade (of each individual client) brings the broker a profit.
What is the B-Book Broker Model?
In order to understand the B-book broker meaning, it should be noted that in this model, the broker prefers to trade against his clients. Brokers operating under the B-book model, also called market makers, take into account the order flow of their clients and, therefore, also the risks. They are always counterparties to their clients’ trades, meaning brokers’ profits are often equal to their clients’ losses. Brokers can manage the risks associated with running a B-book by using certain risk management strategies: internal hedging by matching opposite orders placed by other clients, hedging the largest and most successful clients, hedging clients’ losses, etc. Since most retail traders lose money when trading with B-book brokers, it can be a very profitable model. However, this means that the broker assumes all risks and covers the payments of all clients.
This model is recommended for experienced industry professionals and not for novice brokers who need a larger budget to cover potential client profits (when the market is favorable to traders) in the first few months of brokering.
B-book brokers follow an easy-to-understand scheme. The client buys from the broker and sells to the broker. If the client makes money, the broker loses it, and vice versa.
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 reality, that number can exceed 90%. 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.
Advantages and Disadvantages of A-Book and B-Book Broker Models
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. Let’s take a closer look at each of them.
A-Book Broker Model Advantages
The A-book has a number of positive aspects, which are listed below.
- No trading risks
- Profitability depends only on the volume of trading turnover
- Ability to work with traders, trading in different styles (on the news, scalpers, arbitrage)
- The quality of order execution does not depend on the trainer’s performance
- Absence of a conflict of interest
- No restrictions on the level of income and profitability
A-Book Broker Model Disadvantages
This model also has a number of significant disadvantages.
- Lower yields
- Quality of order execution depends on liquidity providers
- A large enough capital is required to open a liquidity provider’s deposit
- The quality of order execution may be worse than in the B-book model
- Tougher limits on the level of leverage and stop outs
B-Book Broker Model Advantages
The B-book brokerage model also has a number of undeniable advantages, which are as follows.
- Higher level of profitability (compared to the A-Book model)
- No need to raise additional funds to open a deposit with liquidity providers
- Good order execution (on loss-making accounts)
- Very loyal conditions on the level of stop outs and leverage
B-Book Broker Model Disadvantages
- Increased trading risks (related to traders’ profits)
- For profitable traders (in some cases for all traders), the quality of order execution deteriorates
- The broker’s profitability depends on the traders’ performance
- The possibility of stable earnings over a long distance is reduced to a minimum (the trader’s profit is a loss for the broker)
Profitability of A-Book vs. B-Book Broker Models
Profitability is one of the factors that allows you to understand the difference between a book and b book broker.
Unlike stock trading, the Forex market is relatively decentralized, which allows many companies to use a fundamentally different model of operation, which leads to a conflict of interest between the trader and the company. This model is somewhat similar to the one used by betting companies, i.e., the liquidity provider/supplier is the broker himself. Such a model, as we mentioned before, is called B-book. Applying this, the Forex broker earns only on losing traders’ positions. Accordingly, any profit of the client will be a loss for the company. Obviously, in this case, the broker does not want to share his profits with anyone and will try to complicate the work of the trader, who trades on the plus side by various manipulations, minimizing his chances to earn.
The A-Book model is a fundamentally different model of work in which there is no conflict of interest between the trader and the company. In this scheme of work, all client’s positions are transferred directly to the liquidity provider, and the broker earns only on commission or markup to the spread. 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.
Obviously, for professional traders, there are no alternatives to A-book, so the choice is obvious. For beginners, B-book brokers can also be suitable, but only as long as the client loses his deposit. At the same time, it is necessary to consider the fact that one of the reasons for the deposit loss can be worse (than in A-book broker) trading conditions.
To conclude, it can be said that the main difference between the A-book and the B-book brokers is the way of processing the deals which come to the broker: the former brings all deals to the real market, while the latter creates its own “market” by regulating the prices.