What is A Book vs B Book in Forex Trading?
A Book vs. B Book (Lion vs. Wolf):
Forex is different from equities or futures trading because your broker can choose to trade against you. This is known as B booking. When your broker sends all your trades to the real market or their liquidity providers, this is known as A Booking.
In futures or equities trading, all your trades are sent to the exchange and matched with other buyers or sellers.
In Forex, your broker can keep your trades ‘in house’. This means that your trades are not sent to the real market. Instead, your broker bets against you, taking the other side of the trade.
For example, if you were to buy 1 lot of EURUSD at 1.35000, then your broker would be selling 1 lot of EURUSD 1.35000. If you win, your broker loses, vice versa.
Why do Forex Brokers B book?
A B book business model is a very profitable one. Statistics says that 90% of traders lose their deposits within 6 months. The statistics favour the broker significantly.
Take a look at this table comparing A Book and B Book revenues:
Clearly you can understand why a broker would choose to B book their clients.
Note: The losing rate of traders drops significantly for deposit sizes above $10,000, which is why some A-book brokerages prefer to have a minimum deposit of $10,000
Fact: IG markets holds the largest B book in the world.
Also take a look at the biggest Forex Brokers in the World by daily Volume:
Increasing the profitability of the B book model — Hybrid Model
Yes, the B book model’s profitability can be increased even further!
What if we could identify those 10% of traders who are profitable and send their trades to the real market, while we keep the other 90% of losing trades?
This is called the hybrid model and it is a very popular model adopted by many of the large and popular Forex brokerages today. The challenge lies in correctly identifying losing and winning traders.
There are trade analysis software out there which can predict whether a trader is worth B booking.
Certain tell tale signs include:
- Maxing out of leverage,
- Risking more than 10% of account balance per trade
- No stop loss
- Deposit size less than $10,000.
Pros and Cons of a B Book Broker
So what are the pros and cons of trading with a b book broker?
Well, if your Forex broker purely B books you, without giving you slippage, then it is actually good for you! You can deploy strategies that won’t work on A book brokers such as news trading.
This is because in an A book broker, if you were to place a buy and sell stop just before the news, hoping for a breakout in either direction, you will receive a lot of slippage, because there is simply no liquidity to fill your trade during news.
In a B book broker, there is ‘unlimited liquidity’, hence whatever price you want to be filled at, the broker will ‘make a market’ for you, and fill you at the price you want. As a result, there is zero slippage, and news breakouts can be very profitable.
However, B book brokers today will simulate your fill against the real market, and B book you. This means that your trade is filled as if it were to be trading on an A book (with slippage), but instead of sending your trades out to their liquidity providers, they keep your trades in house.
This way, they get the best of both worlds. You receive the slippage, and they bet against you.
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Advantage of A Book Brokers
Liquidity providers don’t like toxic flow from hybrid or B book brokers
All hybrid brokers will send the trades of their profitable traders out to their liquidity providers. This flow is known as ‘toxic flow’, because these are profitable traders and no one wants to bet against them correct?
When banks and other LPs receive these toxic flow, their trade rejection rates are higher. Some of your trades will be rejected by the banks or LPs (known as ‘last look’) and you will receive a worse price, because you will be filled at the next best price.
The good news is that none of this is relevant when trading with a purely A book broker. Liquidity providers like the balanced flow of an A book broker and they are much less likely to reject your trades. This means you get better fills at the prices you want.
Here are some A Book Brokers I found through long research:
- Global Prime (but high Swaps)
- Purple Trading (EU regulated)
- TTD (revolutionary new Broker with Leaderboard)
- Saxo Bank (true A Book, high Deposit, low Leverage)
Read some reviews of Brokers here: http://www.forexpeacearmy.com/forex-reviews/forex-brokers
Cheers and stay tuned for my Trade Copying Service.
Feel free to contact me: https://www.facebook.com/profile.php?id=100014148046307&ref=bookmarks
