Difference Between A-Book and B-Book
October 30, 2016
Foreign exchange trading represents selling or buying a currency pair with the idea of making a profit from the moves that characterize this market. The difference between trading equities or futures, as a matter of fact, is that the forex broker can choose to trade against its traders.
If this is happening, this is known as B-booking. On the other hand, if the broker transfers the customer’s trades to a liquidity provider, this is known as A-booking. Between the two, A-booking is considered nowadays to be a more ethical choice, but the B-booking has the advantage of being extremely profitable.
The reason why B-booking is so profitable comes from the fact that retail traders, statistically, are supposed to lose their first initial deposit in the first six months of trading. Therefore, chances to be profitable by betting against the direction of their customers are quite big so forex brokers are keen in keeping at least one part of their activities in B-booking.
What’s Best: An A-Book or B-Book Broker?
While A-book brokers have the advantage of sending the trades to the liquidity provider, and thus benefited from a “clean” reputation, their trade execution in most of the cases is not that accurate like in the case of a B-book broker. In the end, as a winner on the foreign exchange market, it doesn’t matter for the trader if the broker is a B-book or an A-book one.
What matters is funds security and if no slippage is mandatory for a trading strategy, then a B-book broker may be preferred. From a broker’s point of view, it is about reputation! No broker will tell clients they are B-book or, if they do that, the clients probably have no idea what this means.
Brokers are facing a tough question when running the brokerage house. As mentioned above, the clear majority of traders is losing money, but there are some that constantly make it in the forex market. What is brokers can find a way to differentiate between their clients to find out which one is most likely to be a winner or a loser?
There are several things a broker can do and the first one is to keep both A and B-booking. Moreover, brokers are splitting their traders into these two categories, based on different factors, starting with the risk taken by traders and ending with the size of the original deposit.
In A-booking, the broker earns only from commissions since the trades are transferred to the liquidity provider. Therefore, it is mandatory for traders in the A-booking category to be the ones that are constantly beating the market, for commissions to keep pouring in.
To identify such traders, specific software’s are running client’s database and look for things to differentiate between them. It is no secret that a bigger size initial deposit, for example, bigger than 10k, will lead for that trader to be placed in the A-booking section of the broker, as chances are bigger that the trader will survive on the long run.
This solution is a hybrid model of booking and cumulates both the advantages and disadvantages of the A and B-booking models. After all, the forex business is just a business like any other and profitability matters as much as the ethical principles used to reach it.