Forex trading is a lucrative option for traders looking to take advantage of highs and lows in the value of global currencies. While the concept may appear simple to an amateur trader, it is quite the opposite. There are several layers within the forex trading industry. To understand the functioning of forex industry, it is better to have clarity about the different trading approaches adopted by modern-day forex brokers.
A-book and B-book trading are two contrasting approaches for forex trading which are adopted by brokers to execute the trades of their clients.
A-Book Trading: A Direct Approach Adopted by ECN Forex Brokers
A-book trading is a pure form of forex trading where a client’s order is directly transmitted to a liquidity provider without any intervention. This means that whenever a client places an order, the forex broker sends the order to the liquidity provider. Such kind of trading is one of the most common forms of trading approaches followed by brokers who promise true ECN connectivity.
Brokers earn from increasing trading volumes and there is no conflict of interest between the forex trader and broker. This means that brokers don’t benefit from your losses but grow as your trading volumes grow.
B-Book Trading: Tool for Market Maker or Manipulative Brokers
B-book trading is another trading practice where the broker doesn’t directly send the client’s order to the liquidity provider. Instead, the broker creates an opposite order which leads to the internal settlement of trade orders. For example, if a client places a buy order on a currency pair, the trader places a sell order with the same quantity.
Such a hedging technique for matching the opposite order is used by brokers to spread variations. But this generally means that a broker earns when a client encounters a loss. Simply, B-book approach means that your broker bets against your trading strategy in a bid to earn profits whenever you suffer from a loss.
This trading practice is quite controversial because of the development of a conflict of interest between the broker and the client. Many brokers execute a client’s trades in-house with an intention to earn from a client’s bad trading decisions.
B-book trading practices make loss-making clients an asset for a broker which means his services and packages are more focused on amateurs who are more prone to making losses because of a bad trade. Though this practice is not illegal, it certainly raises ethical questions about the role of brokers who adopt a B-book trading approach.
What’s best for a trader?
As a trader, it is always better to go with brokers who offer true ECN connectivity. That way, the responsibility of your loss truly rests with you. No one is benefiting from your loss. Instead, brokers will actually benefit only when you trade more and more. A broker would provide valuable tools and resources to help you increase your profits which will increase his trading volumes. So, going with a broker who follows A-book practices is better for any trader- amateur or professional.