Some analysis from the team at 4xCube.com: Is B Book business obsolete? How brokers survive in a more competitive environment.
With regards to forex there are multiple ways of processing trades, with A Book and B Book in forex trading, or a hybrid of the two, being commonplace. To understand if B Book business is becoming obsolete, however, it’s important to grasp the details of this technique. And, to check out other ways that brokerages are surviving in an increasingly competitive environment.
What is B Book business in the forex sector?
When it comes to trading processes, there are two main execution models. A Book in forex refers to ECN or non-dealing desk brokers that rely on Straight Through Processing (STP). Brokers operating under this model send executed orders straight to the liquidity pool comprised of several entities acting as a counterpart to the trades coming from the brokerage. In other words, the broker does not act as a counterparty and therefore there is no conflict of interest with each trade. Brokers usually charge commission.
In contrast, the B Book model is where brokers process trades in-house, acting as a market maker or fixed spread broker. B Book brokers often take the other side of client trades which means the broker’s profit is equal to the client’s losses and therefore there is a great conflict of interest. Brokers can potentially take advantage of your trading history in order to make a profit off you and that’s off-putting to many. But just because they act as your counterparty, however, doesn’t mean they’re sitting around waiting for you to lose. It’s all about creating suitable trading conditions.
Is B Book business obsolete?
While it’s obvious that B Book business brings about conflicts of interest in comparison to A Book business – is the former model obsolete? The simple answer is no. This is because many forex traders don’t often think about how their trades are executed behind-the-scenes and instead turn their focus to trading plans, leverage and so on.
What’s more, B Book business does have certain benefits including guaranteed fills on trades even during periods of low liquidity. Fixed spreads are also a highlight. That said, more and more traders are waking up to the downside of B Book business and are looking for brokerages that send trades directly to the liquidity pool.
How are brokers surviving in a competitive environment?
Due to the increase in trader knowledge and the presence of STP, brokers are navigating a more competitive environment in numerous ways. For example, many brokers now use a hybrid solution of A Book and B Book. With this model, brokers can essentially choose whether they put traders in an A Book or B Book depending on factors such as risk profile. If you trade during sessions of high liquidity, trading with an A Book model is likely to be the best option. And, if more traders actively look for STP brokers, this could potentially have a negative impact on B Book business. So, flexibility is key.
In order to gain a competitive edge, brokers are also spending more time on their overall business model in a bid to attract traders. Thanks to technology, brokers can offer a wide range of different trading services including AI-enhanced platforms with a multitude of benefits including rapid execution speeds based on personal risk tolerance. With machine learning able to interpret Big Data, trading patterns become easier to identify allowing traders to profit based on informed and intelligent decisions.