A-Book, B-Book, and Hybrids
Have you ever heard about A-Book or B-book brokers? Unlike other financial instruments (e.g., futures), Forex OTC makes it possible for brokerage companies to take the other side of customers’ trades, that is, trade against them.
This is how the A and B-Book brokers differ from each other with many hybrid variations between them.
The A-Book Model
Brokers that work within this model are known as ECN/STP (Electronic-Communication-Network/Straight-Through-Processing) brokers. They are also referred to as “No dealing desk” brokerages. Brokers alike operate as mediators that transfer all of their clients’ trades directly to liquidity providers or multifunctional trading outlets.
These brokers make money by augmenting the spread or by incurring commissions to their clients. In a situation like this, the interest of both parties doesn’t clash as brokers profit the same amount of money despite the trader is profitable or not.
The B-Book Model
B-Book brokerages, on the contrary, operate differently. They earn exactly the amount that their clients lose and the other way around. Since many customers will be losing in the long run, this means keeping them in their system is only advantageous. It triggers a conflict of interest because clients think that brokers may turn to doubtful practices to secure their profitability.
When it comes to risk management, this model still is viewed as an unsafe one
For this reason, the majority of forex brokers prefer a hybrid model that assumes hedging tactics with liquidity providers and executing trades in a B-book based on traders’ profiles.
The Hybrid Model
The hybrid model is gaining popularity for the following reason – it can combine both, A-book and B-book models. The idea behind this model is that brokers identify profitable traders and send their trades to the real market and at the same time keeping the remaining internally.
As a rule, these are traders who are interested in leverage and free margin while depositing small amounts on their accounts.
Many Forex brokers opt for a hybrid model and this is not considered a bad practice. This model if run appropriately toward risk-management can be very effective and successful.