Foreign exchange (Forex) broker is an organization whose main task is to connect market participants to a particular system where they can buy and sell foreign currencies. All economic transactions in the foreign exchange market occur using two foreign coins, fiat banknotes. Several partners exist in the economic business environment – A-Book vs B-Book brokers. Let’s talk about each intermediary and which system provides more revenue.
A-Book Forex Broker System
Middlemen performing under the A-Book structure are Electronic communications network (ECN) agents, often referred to as middlemen without a dealing desk. Such specialists give customers’ orders directly to the liquidity providers (LP): this is a series of firms that work as counterparties to bargains obtained from the Forex agent. The only data the LP has is the value at which the customer plans to purchase or vend an order.
With such an algorithm of interaction, the A-Book Forex brokers are not counterparties of the customers. For many investors, it is critical to be able to collaborate with an agent without worrying about a clash of interests. Such an intermediary’s income is the charge customers pay if they open and close a position.
The A-Book system is an excellent option for new intermediaries who want a helpful experience in the Forex environment. The structure of A-Book brokers provides the following advantages:
- Greater accuracy and transparency for agents.
- Intermediaries receive marketing benefits when interacting with customers, as they can explain to investors that they do not have a clash of interests.
- The waste of market players does not affect the earnings of the middleman since his income is generated from spreads, regardless of the size of the bargains. One bad deal doesn’t make a big difference.
- The risk of an agent is minimal since it performs as a middleman, which reduces its dependence on market conditions and stored liquidity.
The A-Book system has some disadvantages for investors and intermediaries. The agent must sign contracts with LPs, issue licenses, and guarantee technical support so that his customers’ orders start dealing on the global market; all this requires time and financial spending. It means the intermediary must take a hefty commission to cover their expenditures.
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B-Book Forex Broker System
When utilizing the B-Book scheme, the investor’s partner in the bargain is a market maker who seeks to find a proper order from his consumers (if the owner of the capital wants to get one lot, an agent tries to find a market player who is ready to vend the necessary resource). In the absence of such an offer, the market maker works as a counterparty leading to a conflict of interest. If the investor makes an income, the market maker can pass the order to the LP.
Such a system is suitable for professionals, not for new agents who need a significant budget to cover the potential earnings of customers (if the market turns out to be favorable for investors) in the first months of the professional activity. Let’s analyze the main advantages of B-Book brokers:
- Fixed fee: the trader must pay the counterparty a constant spread when opening and closing any position. It allows the broker to earn capital, whether the investor is betting on a down or upmarket.
- B-agents can minimize risk using unique tactics, e.g., hedging through opposite order matching, spread adjustment, etc. Often, inexperienced investors lose capital, which is beneficial for their counterparties.
- B-brokers do not pay charges to LPs, which increases their competitiveness.
It is vital not to forget the investor’s revenue can be detrimental to the B-Book agent. Therefore, unscrupulous intermediaries who resort to various tricks appear on the market, e.g., indicating non-market quotes in the terminal or monitoring selected customer stops and knocking them down via plugins, so the trader wastes his savings. We recommend you read reviews about counterparties before starting interaction with them to avoid becoming a victim of scammers.
Hybrid Forex Broker Model
The hybrid system combines the properties of A-Book vs B-Book brokers. Agents independently decide whether to place a client in the A-Book or B-Book. The intermediaries will analyze his risk appetite and other criteria to either submit the order as an STP or process it themselves.
In that case, the trader is unlikely to notice the distinctions. Investors with a limited deposit but used to Forex trading with significant leverage are considered riskier, so such trades are classified as B-Book. As a rule, these are newcomers to the foreign exchange market who do not have the necessary knowledge and skills. And this raises the risk that such market players will lose capital.
Thus, agents are more likely to receive income by applying the B-book system. Although clients will continue to pay a fee or markup on the spread, this does not mean their transaction will be carried out using STP.
Profitability of A-Book vs B-Book Brokers
After studying the materials above, you may have questions: what will provide more profit: doing business as agent A-Book or B-Book? Which interaction variant is the optimal solution if you plan to decrease professional risks? There is no universal answer to these questions; it all depends on the specific conditions.
If you believe the statistics, the revenue margin of the A-book agent is smaller but more reliable. Some research in the foreign currency environment demonstrates that about 90% of investors waste their primary capital within 6 months, which is especially beneficial when discussing B-book intermediaries. But it’s also critical to be aware of the various force majeure events that often happen and force B-book agents to endure heavy wastes, often for extended periods.
None of the Forex models, such as A-book vs B-book brokers, guarantees that you can make profitable deals constantly. These structures are one of the business instruments; the benefit you can obtain depends on how effectively you utilize them.
If you manage your organization responsibly, patiently wait for the best market conditions, and implement algorithms tailored to your firm needs, the Forex environment will create limitless opportunities to ensure economic prosperity.