A-Book in Forex is a business model and a type of execution of client trades when a broker as an intermediary conducts client transactions through a prime broker or a liquidity provider. Other models are B-Book and mixed or hybrid model.
According to the A-Book model, all client transactions are transferred to an external trading platform or “interbank market,” where a liquidity provider fills the orders. Here other trading members’ reverse transactions cover client transactions on similar terms. The A-book model provides more transparency for the broker, as it directly facilitates the trade.
Types of A-Book in Forex
A-Book brokers are also called NDD brokers (No Dealing Desk). NDD brokers are subdivided into STP (Straight Through Processing) and ECN brokers (Electronic Communications Networks). In brokerage terms, there are the following similarities between STP and ECN methods of order execution:
- Brokers send trade orders straight to liquidity providers. Thus, they play the role of a bridge between liquidity providers and their customers.
- There are no order requotes.
- They do not use a dealing desk, but do use technologies.
- Brokers pass the spreads from the liquidity provider to customers and charge extra commissions.
There are also several differences between these models:
- Routing. STP brokers can select any liquidity provider from their liquidity pool, while ECN brokers work just like a hub.
- Minimum lot size. STP has no limitations, while ECN is limited to a 0.1 minimum size, since very few providers allow lots under 0.1 size.
How is a Customer Trade Conducted in Forex
The broker working under the A-book model passes trader’s orders to the liquidity pool. A liquidity pool is a collection of funds that reacts to the number of orders by price increase or decrease. They are used to facilitate decentralized trading and are helpful for managing open trades, adjusting stop losses, and starting new trades.
In most cases an A-Book broker charges a fee on the trades, referred to as the round trip lot. The trader pays a commission when he opens and closes a position.
This system effectively works for managing open trades, starting new trades, and adjusting stop losses. An A-Book trader’s actions can be described in a step-by-step procedure:
- The trader opens a position/places an order to buy USD/GBP.
- The broker sends the trader’s order to a liquidity provider.
- The liquidity provider confirms the trade on its side.
- The liquidity provider sends the trade confirmation back to the broker.
- The client’s trade is done.
A-Book brokers need special solution to simplify the above-described process, also known as a Liquidity Bridge.
Spread or How Does the A-Book Broker Make Profit
The spread is the key to the broker’s profit. Read more on what is a spread in forex and the factors that affect the value of the spread in a corresponding article.
So, how does a broker earn money? The trader places an order and pays fees for spread markups and for every transaction. Sometimes the broker can also add an extra markup on the prices to boost his profits.
There are no conflicts of interests, because the broker earns money whether or not a trader has taken profit. The broker isn’t interested in failures of his clients, which makes A-book reliable.
At the same time, a trader’s profit is advantageous to the broker, since the longer they cooperate, the more money the trader brings to the broker. The trading conditions provided by A-Book brokers entail a relatively high minimum deposit to open an account. Thus, many A-Book brokers raise the minimum deposit size to $5,000 — $10,000. Another reason for a high minimum deposit is that the larger the initial deposit, the more adequate the trader.
The Pros of A-Book
There are several advantages that the A-book model provides to the forex broker:
- Greater transparency for the broker.
- The broker has marketing advantages in working with traders, since he can reassure traders he does not have a conflict of interest.
- The broker is not afraid of the trader’s loss, since his profit comes from spreads on any volume of trades. One loss or profit plays a minor role.
- The broker’s risk is negligible because of his facilitator role, which minimizes his exposure to the market and stored liquidity.
The Cons of A-Book
There are two sides to everything, and the A-book trading model has some cons, too:
- The A-book model works only when a trader’s order is matched with a counterparty buyer or seller. If there are no matches, the chances of remaining open or being matched at the best available price are low.
- The broker pays a deposit to the provider, which requires sufficient funds.
- The broker has to have access to several providers, to prevent downtime. Providers sometimes conduct technical maintenance and are unable to provide quotes or process transactions. This situation is disadvantageous to the broker.
- The broker needs to review providers regularly, reexamine the conditions and select the best one.
- If the broker gives leverage to the trader, he needs to keep track of his clients’ transactions and make sure they aren’t in the red. Otherwise the broker has to reimburse the liquidity provider with his own money for the trader’s losses. Thus, forex brokers need to use special instruments like Dynamic Leverage to reduce the risks when working via the A-book model.