Introduction

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There are many modes for foreign exchange brokers to process orders: MM, ECN, STP, DMA, etc., while foreign brokers are usually called A-Book, B-Book. A foreign exchange broker is a service provider that helps customers complete foreign exchange transactions, and is a bridge for customers to conduct foreign exchange transactions, just as a broker helps users make stock transactions. But foreign exchange is different from stock and futures trading, because your broker can choose to trade with you as a counterparty. This is often referred to as B booking. Because of this, there are two completely different types of A-Book and B-Book. means of transaction. Spot foreign exchange is different from other financial instruments, because the broker may become the client's counterparty. This is also the difference between the A-book model and the B-book model. There are many hybrid brokers that use both models at the same time.

A-book mode

A-Book refers to the fact that the broker throws out the customer's order, throws it to the bank or liquidity provider, etc. Then gain profit by charging spreads or commissions. The order modes such as STP/ECN/DMA mode that we usually talk about belong to the category of A-Book.

For brokers, the A-Book method transfers trading risks. Brokers can obtain stable profits by relying solely on trading volume; however, at the same time, this also means that traders give up huge opportunities for profit. Why do you say that? Everyone has heard of the "Twenty-eight Law" of the foreign exchange market, which means that 80% of people are losing money. For the large number of users of brokers, most users lose money when they withdraw funds. To give a simple example, add a person to deposit 10,000 US dollars, and only 100 US dollars are left when the final withdrawal is made. In this process, the brokerage fee may have only earned $100, and if the platform eats this part of the loss, the profit will be greatly different.

For users, the broker who implements the A-Book model has no conflict of interest with them. On the contrary, they make a profit and the transaction volume increases. The other party can get more commissions, so there is no need to worry about the broker preventing their profit. This is also the reason why A-Book model brokers have been very popular in China. However, A-Book also has its own shortcomings. The liquidity of A-Book depends on upstream liquidity providers. It is inevitable that there will be problems such as delays, inability to execute orders, and slippage, and the order turnover rate is low. This will also affect the user experience.

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In short: A-BOOK model brokers hope that their customers will continue to make profits, and the larger the order volume, the better, so that both parties have benefits.

If the broker passes customer orders to liquidity providers or multilateral trading platforms, this is the A-book model. In this case, the broker obtains income through spreads or commissions, and there is no conflict of interest between the broker and the client, because the broker receives the same profit regardless of whether the client is profitable or not.

The real STP/ECN brokers only operate the A-book model, they pass all customer orders to the liquidity provider.

B-book mode

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B-Book means that the broker does not throw the user's orders to the market or the liquidity provider, but "eats" the user's order. The broker itself and the user do a counterparty position or conduct it on the platform. Hedging, MM belongs to the B-Book category, commonly known as the gambling model.

For brokers, if the B-Book model is adopted, the broker is equivalent to the dealer. The user earns the money of the broker and loses to the broker. Since most users are losing money, this is very beneficial for brokers. However, correspondingly, this model requires the broker to bear huge risks. At the same time, because there are many customers who are very familiar with the trading rules, they can often catch the loopholes of the broker, obtain considerable profits and even conduct risk-free transactions. .

For users, because the brokers in the B-Book model quote directly, there is often no slippage, and the order execution is more stable and faster. This also makes it possible to implement some strategies that cannot be operated on A-Book, such as news trading. Because at A-Book brokers, if stop-loss buy and sell orders are placed before the news, users will get a lot of slippage during the news release due to lack of liquidity, but B-Book brokers theoretically have " Unlimited liquidity", so no matter what kind of order there will be no slippage, this method is profitable.

However, in a purely B-Book model broker, users have to worry about the brokers compliance issues. Due to the obvious conflict of interest between brokers and users in this mode, brokers may manipulate user orders, their own quotations, prevent users from making profits, etc., in fact, these are indeed common in the foreign exchange market. Therefore, users will inevitably feel disgusted with this approach and worry that their profit will be restricted by the broker.
In short: Brokers in the B-BOOK model hope that their clients will lose money quickly, and even use their hands and feet such as abnormal slippage, disconnection, prohibit high-frequency trading, and even modify K-line.

If the broker does not pass customer orders to the liquidity provider or the market, it is the B-book model. This type of broker is also called a market maker and is the counterparty of the client's transaction. Such brokers can better control the risks brought by the B-book model through some risk control strategies, such as internal hedging and spreads.

Obviously, operating the B-book model will cause a conflict of interest between the broker and the client. Because the client makes a profit, the broker will lose money, and vice versa. Customers often worry that brokers will use improper means to ensure profitability. This is the reason why many brokers operate both models at the same time, passing some customer orders to the liquidity provider while the other part stays inside the broker. The profitability of this hybrid model is very high and is adopted by many brokers.

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Mixed mode: [A-Book combined with B-Book]


Since both A-Book and B-Book have their obvious advantages and disadvantages, many brokers will adopt both models at the same time in order to avoid the shortcomings of these two models, and be flexible according to different accounts Switch to maximize the benefits.

At present, many brokers will use the combination of the two methods, which requires the broker to effectively identify profitable and loss-making users, and decide how to handle their orders according to the nature of the users. There are many softwares that provide related identification services. The criteria for judging the provision of B-Book services may include excessive use of leverage, each transaction exceeding 10% of the account balance, no stop loss, and account size less than US$10,000 (research indicates that when When the account amount is greater than US$10,000, the winning rate will increase significantly) and so on. According to their own judgment standards for the account, the broker throws the potentially profitable orders to the market and leaves the possible loss orders to itself. This method can not only improve the profitability, but also improve the reputation of the broker.

With the combination of A-Book and B-Book, the biggest challenge for brokers is risk control. How to make judgments and choices has become an extremely important issue. If the broker does not manage B-Book's risk well, it will lead to the company Loss, thereby endangering the companys survival. In addition, this model also puts forward very high requirements for the execution of the broker A-Book.

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【Last look】

Under this combined mode, there is also a problem involved, which is the problem of Last look. Last look means that the bank that provides liquidity can see the customer's quotation before the order is executed to decide whether to execute the transaction.

For brokers who use both A and B-Book models at the same time, when they sell orders to liquidity providers, all they sell are orders from profitable customers. This is for liquidity providers. Adverse. So when they see these orders, the rejection rate will increase, which means you will get a worse offer, because the order will match the next best offer, purely the possibility of A-Book being rejected It is very small.

For now, it is difficult for a pure B-Book platform to survive (it is easy to be killed), but at the same time, pure A-Book is equivalent to giving up a big piece of fat for brokers.

Therefore, the normal model has both A-Book and B-Book. The biggest challenge for brokers in this model is risk control. How to find loss-making customers and profit-making customers is particularly important for brokers, but At the same time, there are also very high requirements for the implementation of A-Book, which directly affects the customer's experience.

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Actually, for users, which model the broker adopts is not the most important thing. As we often say, the foreign exchange market is a zero-sum game. Someone gains while others loses. We have made a profit. It doesn't matter if the counterparty is the bank, other retail accounts, or the broker itself. The important thing is that everyone is willing to bet and lose. A good broker, as long as he abides by the rules, executes well when doing A-Book, provides users with a good trading environment, and does not deliberately slip or delay when doing B-Book. Break the rules and do not hinder user profitability. For the user, it is enough. A-Book, B-Book, or a mixture of the two, the model itself is not good or bad. The key issue is how the broker is responsible for its actions. Of course, we must carefully screen, stable transactions and reputable brokers are the first priority selected

The popularity of the hybrid model is understandable because it can increase the overall profitability of the broker. In addition, under this model, brokers only need to pass orders to various liquidity providers to make profits while making their clients profit.

The key to controlling risks of mixed brokers is to classify customers, that is, to classify customers into A-book mode and B-book mode. Most industry risk control software can determine how to classify customers and help brokers maximize their profits.

The following types of traders are likely to be classified as B-book models:

Use a larger leverage ratio

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Each transaction invests a greater risk of capital

Traders who do not set a stop loss

Traders with small trading volumes (statistically speaking, accounts with small trading volumes are unlikely to be profitable)

For traders, the hybrid model is not necessarily a bad thing, because in terms of spreads, many hybrid brokers are still very competitive. For the profit (that is, the loss of the broker) obtained by the B-book model customer, the broker can make up for it by increasing the spread of the A-book model customer, which is obtained from the liquidity provider. If the mixed-mode brokers have poor risk control, they will make a lot of losses due to their B-book model customers.

To sum up

Many brokers classify them according to the specific circumstances of their clients and transactions. Client orders under the A-book model are directly passed to the brokers liquidity provider, while other orders are divided into the brokers B-book model. Many brokers are hybrids, and this model is essentially not harmful. However, many traders prefer to trade with STP/ECN brokers. Further charges and court trials.