B-book in Forex is a method of client trade execution when a broker processes of client trades in-house using a dealing desk. And while an A-book broker conveys client transactions to a prime broker or a liquidity provider, in the B-Book business model the broker stands in these roles by himself.
There are different names for B-brokers in Forex: market makers or fixed spread brokers, since they generate a market, even the smaller ones than the big market, they are called market makers. B-brokers can be of two types: regulated and non-regulated Forex brokers. The first ones have “market maker licenses” issued by:
- ASIC (The Australian Securities and Investments Commission),
- NFA (National Futures Association),
- FCA (Financial Conduct Authority),
- other controlling agencies in different countries.
All of them play on the opposite side from their clients, taking profit when traders lose. However, the B-Book model doesn’t work when all traders always lose. Hence brokers use a management strategy to gain more money and to balance out the traders’ gains and losses.
How is a Customer Trade Accomplished in Forex and What is a Dealing Desk
The dealing desk arrangement helps to accomplish selling or buying orders in the B-Book business model of Forex market.
Brokers work with a dealing desk in two ways:
- They place traders’ orders against each other. This concept is built on the correspondence of the first client’s wish to sell a specific currency pair and its price, and the second client’s wish to buy the same currency pair and its price. The broker matches them and earns on the spread. Since traders don’t need to pay for the LP’s (liquidity provider) spread required with no dealing desk, they pay less to the broker they work with.
- They hedge the trade themselves. This strategy presumes that the broker matches the order himself if there are no opposite matching orders for a position. Primarily, the trader declares the price at which he/she wants to buy or sell. Then if the broker finds it acceptable, he accepts this price and fills the order based on the LP’s price. When closing the trader’s position, the broker fills the order based on the LP’s price again.
What B-Brokers Should Keep In Mind
When starting to work with the B-Book model, the broker needs to bear one important thing in mind: he needs a large security deposit to get a market maker broker license in an acknowledged non-offshore jurisdiction. Moreover, the broker has to submit reports to the regulator, considering that some offshore locations don’t have forex licensing at all. All these things make the broker trustworthy, , but they require financial commitment.
B-Book Brokers in Forex and Their Clients
The B-Brokers’ reputation is damaged by scam brokers right from the outset. Since they are non-regulated, they cheated their clients by manipulating the trading conditions. And the market has been cleared of them.
Speaking about regular work with B-Book, it is crucial to mention the conflict of interest since B-brokers take on the role of liquidity providers. Some brokers name this business model a “bucket shop,” and it has a working scheme: when clients earn money, the broker loses his profits and vice versa.
But not only money has significance in the B-Book model; the number of traders who stay with the broker are equally important. If traders quit, the profits are gone, too.
Thus, the broker has to feel and understand the borderline between his one-time gains, and the option to leave his trader with nothing, and profits in the long-term outlook by taking care of traders’ interests. This is the main brokers’ operation concept — managing the risks of their entire client base and their own risks in such a way that they can have a more profitable business that benefits everyone.
The Pros of B-Book
- Fixed fees. The broker charges fixed spreads that the trader pays every time he opens or closes a position. Therefore, the broker earns money regardless of whether a trader works when the market is up or down.
- B-brokers have certain advantages that they offer to their clients: “unlimited liquidity” and maintenance costs.
- B-brokers can manage the risks associated with the holding of a B-book by using certain risk management strategies: internal hedging through the matching of opposite orders submitted by other clients, spread variations, etc. As most retail traders lose money, the use of a B-book is very profitable for brokers.
- B-brokers can avoid paying commissions to liquidity providers that allow them to be more competitive.
The Cons of B-Book
- Problems with confidence and honesty. The concept of B-book brokers has received bad publicity in the trading community because of some dishonest brokers who manipulate the trading conditions. Traders are often worried about being subjected to the underhanded tactics of some brokers who seek to always be profitable.
- The B-broker is obliged to pay for clients’ beneficial trades with its own money.
- B-brokers spend more money on dealing and risk-management software, like tools that monitor platform abusers. For example, risk profiling or anti-fake account plugins.
- Some regulators forbid all types of B-book dealing, strictly checking broker’s trading reports.