To understand the difference between the so-called A-book and B-book forex brokers, we have to understand what the concepts of the A-book and B-book are.
The general concept of the A-book and B-book refers to the manner in which brokers distinguish and separate their clients, based on the degree of risk that each clients’ order presents to the broker’s dealing desk. Retail forex brokerages typically have links with several liquidity providers in the interbank forex market. They get their liquidity and pricing from the big banks and prime brokers operating in the interbank market, and chop these into smaller positions that enable them fulfil their clients’ trade orders in a matter of milliseconds. These orders are all fulfilled automatically at the trading stations in the dealing desks operated by the retail forex brokers.
However, there are some orders which by virtue of trade size or due to the fact that these orders will pose in-house risk to the counterparty function of the dealing desks, cannot be fulfilled in-house. These orders will have to be routed to external venues for fulfilment. This is the basic operation that enables forex brokers to separate their clients’ orders into two liquidity buckets: the A-Book and the B-book.
Before moving on to the discussion, it must be stated clearly here that there are no exclusive A-book or B-book forex brokerages. Nearly all, if not all forex brokers operate both models. Which liquidity bucket the forex broker decides to use at any time depends on what their clients are doing in the market.
It is also pertinent to define the dealing desk. A dealing desk is a department within a retail forex brokerage that is responsible for matching and executing trade orders of their clients. These clients are usually those in the B-book liquidity bucket.
So who are the A-book forex brokers? These are the forex brokers that routinely pass on their clients’ orders for fulfilment in the interbank market or other external execution venues. They could sum up the traditional definition of a brokerage: they source the liquidity for their clients’ orders and pass these orders on for other entities to fulfil. They act like facilitators to these transactions. The closest brokerage model to the A-book forex brokerage model are the STP brokers. However, this is not to say that market makers do not routinely carry out A-book order fulfilments.
There are some reasons why some brokers decide to use the A-book fulfilment model. If a brokerage is an STP brokerage, this is pretty straightforward. By their very nature, these brokers never fulfil orders in-house. Orders are always sent to the interbank market. The broker makes money from spreads as well as from the commissions charged on the buy-sell sides of the trades. There is therefore no motivation to fulfil orders in-house.
For the market makers who routinely fulfil orders in-house using a dealing desk, the only motivation to perform A-book fulfilment transactions is simply to prevent risk to their positions. Market makers routinely take the opposite sides of their clients’ positions. Statistics have shown that 95% of retail traders lose money in forex, so this makes the counterparty operations of the market makers very profitable. However, there are the 5% of retail traders who consistently make money. Obviously, no brokerage will like to see their positions fall into losses on account of these traders. So the logical thing that the market makers do with such clients is to put them into a different liquidity bucket known as the A-book. The positions in the A-book are those which constitute inherent risks to the market maker and therefore the only way to avoid such counterparty risk is to ship the orders somewhere else for execution. The banks at the interbank forex market do not take counterparty positions, so they will be happy to fulfil such positions as they come in.
This is what the A-book operations are all about.
Now what about the B-book forex brokers? As you may have guessed, the market makers always have the B-book system in operation. Remember the 95% of traders who are not usually profitable as forex traders? Well, these are the traders lumped into the B-book liquidity bucket for in-house order fulfilment by the broker’s dealing desk. The B-book forex brokers routinely use their in-house dealing desks to fulfil such orders, usually by taking a counterparty position to the trades of these clients.
In some instances, such brokers typically use what is known as a dark pool to mask the true identities of where the orders are being fulfilled. As two different traders send orders to the brokerage, the broker may decide to send the order to the dark pool, where another market maker picks up the trade and also drops off an order for execution in the dark pool. So both traders get their orders filled, and even though it may not show up as being executed at the dealing desk, the reality is that the order may have been filled in a dark pool without ever hitting the interbank market.
The difference between the A-book and B-book forex brokerage model is pretty simple. The A-book utilizes interbank market executions for clients’ orders, while the B-book process leads to internal order fulfilment without the usage of the interbank market.
A-book: You are trading with the banks and you have various options at transparent pricing. The broker provides the software and access to the interbank market.
B-book: You are trading with the supposed facilitator.
The irony of the entire thing is that as a trader, you do not know what book your trade is on. If you are a consistently profitable trader, chances are that the forex broker would not take chances trying to trade against you. So your orders will more often than not, be shipped off to the interbank market. Imagine being in a situation where you consistently trade 5 lots on a commodity CFD and on each trade, you are banking thousands of dollars consistently.
The same situation occurs if you trade large volumes of say, 100 lots. A trade size of 100 lots is worth $10m trade value on the EURUSD, with a monetary value per pip of $1000. If you make 200 pips a month as total profit, you walk away with $200,000! No broker will take chances at opposing your trades.
But if you trade a small account and are not very consistent in profits, then you are more likely to be placed in the B-book liquidity bucket.