A Book vs B Book Forex Brokers: A Guide for Beginner Forex Traders

If you’re stepping into the world of forex trading in Kenya, you’re joining a rapidly growing community of enthusiastic traders eager to make their mark in the global financial markets.

But as you dive deeper into this intriguing world of pips, leverage, and currency pairs, there’s a crucial decision awaiting you - the choice of a forex broker.

In the realm of forex trading, not all forex brokers are created equal. While you might be tempted to simply choose a broker based on attractive platform features or bonuses, there’s a fundamental distinction that many beginners overlook: the difference between A Book vs B Book brokers.

This distinction isn’t merely about jargon or complex financial terms. It’s about understanding the very mechanics of how your trades are processed, the potential conflicts of interest, and the overall transparency of your broker.

By grasping the differences between A-book vs. B-book forex brokers, you’re better equipped to navigate the forex waters with more clarity, ensuring you’re not caught off guard by unexpected practices.

In this guide, we’ll demystify the concepts of A Book and B Book brokers, shedding light on their pros and cons and providing real-world examples. This will help you to make better and more informed decisions when choosing a forex broker

The Differences: A Book vs B Book Brokers

A-Book Brokers

A-Book brokers, often referred to as STP or ECN brokers, send all your trades directly to the liquidity providers or the interbank market. They act as middlemen without interfering or taking the opposite side of your trade.

B-Book Brokers

B-Book brokers, commonly known as Dealing Desk brokers, take the opposite side of a client’s trade. In essence, if you profit, they lose and vice versa. Essentially, they bet against the trader.

However, just because a broker doesn’t offer an ECN account doesn’t automatically mean they are a market maker. Many brokers operate with a hybrid model, where they offer both ECN and standard accounts.

Check out our list of the Best ECN Forex Brokers.

But here is where the lines become quite blurred:

All Regulated Forex Brokers Possess a Market Maker License

Yes, that’s right! Regardless of whether your broker is regulated by the CMA, ASIC (Australia), FCA (UK), or the NFA (USA), they all have one thing in common: a “market maker license.” This means every regulated broker possesses the capability to act as a market maker.

What Exactly is a Market Maker License?

At its core, a market maker license gives a forex broker the option to either fill trades internally, which is called B-Book, or to pass them through directly to the market, referred to as A-Book. Essentially, brokers with this license have a choice of how they manage your trade orders.

B-Book vs. A-Book: Breaking it Down

Let’s dive a bit deeper with some specific examples:

1. B-Book (Internal Filling) Scenario: You decide to trade EUR/USD and place a buy order. Instead of sending this order to the market, your broker, with a market maker license, may choose to keep the trade in-house. This means they take the opposite side of your trade.

   Benefits for the broker:

   • They earn from the spread.
   • They can potentially profit if you lose on that trade.

   Risk for the broker:

   • They can lose if you win on that trade.

2. A-Book (Passing to the Market) Scenario: You’re trading GBP/JPY and place a sell order. Your broker decides to pass this order straight through to the liquidity providers in the market.

   Benefits for the broker:

   • They don’t carry the risk of your trade, as they are not the counterparty.
   • They earn a commission and/or spread.

   Risk for the broker:

   • None, as they have passed on the trade risk to the market.

But How Do You Know Which Book You’re In?

Here’s the catch: you might never know. It’s the broker’s prerogative, based on their risk management strategy, to decide where to place your trades.

Some forex brokers might place certain clients or trade sizes in the B-Book, while others might go directly to the A-Book.

For example, if you’re a beginner forex trader with a history of losing trades, a broker might be more inclined to keep you in the B-Book, anticipating that they could profit from your potential losses.

Conversely, if you’re a professional trader with a winning streak, brokers might pass your trades to the A-Book to mitigate potential losses on their end.

Forex brokers are also much more inclined to put traders with big account sizes on the A-book.

Imagine you have a sizable account, say $200,000. You decide to go short on 1,000 lots on USDJPY. If you pick up just 100 pips, you’ve made a staggering $1 million. Sounds thrilling, doesn’t it? But, for the broker, this is a heart-stopping risk.

That’s a $1 million the forex broker potentially lost if they had B-Booked your trade. And that is a risk most forex brokers are simply not willing to take. Instead, they’d rather pass on the trade to the liquidity provider and make a smaller commission than risk losing such substantial amounts.

On the flip side, If you’re trading with a smaller account, there’s a high likelihood that your trades are executed on the B-Book. 

Why? 

The potential profit or loss from your trades is smaller, and the risk to the broker is comparatively less. 

If you’re trading $200 and pick up 100 pips on a single lot, you’ve made $100. It’s a commendable win for you, but for the broker, the risk is minimal. 

So, it becomes more economically feasible for forex brokers to B-Book smaller accounts, hoping that, statistically, they’ll come out on top.

How to Test Whether You’re in the A-Book or B-Book of a Broker

One of the most telling signs that you’re in a forex broker’s B book is how your trades are treated during major news releases. In the world of trading, news releases can create volatile market conditions. It’s a time when prices can jump significantly in mere seconds.

For instance, suppose there’s an upcoming U.S. Federal Reserve announcement. If you place a trade shortly before the release, and it gets filled promptly even amidst the volatility, there’s a good chance you’re in the B-Book. A genuine market order, with real liquidity behind it (A-Book), would typically face slippage or delays during such high-volatility periods.

Alternatively, before opening an account or even after, approach your broker’s support or account manager and directly inquire, “Are my trades passed to the interbank market or kept in-house?” Their response can provide insight, especially if they’re hesitant or vague.

Does it Matter Whether You’re in The A Book or B Book

Being on a forex broker’s B-Book isn’t necessarily a bad thing. In fact, some traders with certain strategies might find it works even better for them. The key is to know where you’re at, be clear about things, and make choices that best suit your trading style.

Scalpers, for example, might prefer the tighter spreads and rapid execution of the B Book while a swing trader might lean towards an A-Book for transparency. 

However, for many forex traders, the perception of a conflict of interest in the B-Book model can be off-putting. If you’re one who values transparency above all else, you might be more comfortable with the A-Book model.

Personally, I’ve always preferred to be in a broker’s A-Book, and there’s a clear reason behind this choice.

Being in the A-Book ensures that my trades are passed directly to liquidity providers, allowing for a transparent and open market experience. This setup aligns my broker’s interests with mine, creating an environment of mutual growth rather than competition.

Trading profitably is the surest gateway to the A-Book.

Forex brokers are in the business of making money, but they also need to manage risk.

When you trade profitably and consistently take the broker’s money, you essentially tip the balance of risk in your favor. It makes more sense for the broker to move you to the A-Book, where they can earn a commission without the risk of losing out when you win.

Pros and Cons: A-Book vs. B-Book

A-Book Pros:

• More transparency as trades are passed to the open market.
• Broker’s interest aligns with yours (they profit from commissions, not your losses)

A-Book Cons:

• Sometimes higher commissions or fees.
• Potentially less favorable trading conditions during high volatility.

B-Book Pros:

• Often tighter spreads since they’re set by the broker.
• Some brokers offer better educational tools to B-Book clients (as it’s in their interest for you to trade more).

B-Book Cons:

• Potential conflict of interest since the broker profits from your losses.
• Possibility of price manipulation.

Understanding the Basics

Before we dive into the intricacies of A Book vs B Book forex brokers, it’s essential to grasp some foundational concepts. This will ensure you’re well-equipped to discern the differences and implications of each broker type.

What is a Forex Broker?

A forex broker acts as an intermediary between you, the trader, and the vast forex market. They facilitate your trades, giving you access to currency pairs and financial instruments that you otherwise wouldn’t be able to access on your own.

In essence, think of forex brokers as the bridge connecting you to the global currency exchange landscape.

Example: Imagine wanting to exchange Kenyan Shillings (KES) for US Dollars (USD). Instead of flying to New York and finding someone to exchange your money, you’d probably visit a local bank or forex bureau. Similarly, in online forex trading, forex brokers offer platforms where you can make such exchanges, but on a much larger scale and often with leverage.

The Role of Brokers in Online Forex Trading

In the world of online forex trading, forex brokers wear many hats. They provide the trading platforms, tools, and resources needed to execute trades.

Additionally, they offer leverage, which allows traders to control a larger position with a relatively small amount of capital.

However, the way brokers handle your trades can vary significantly, and this is where the distinction between A Book and B Book forex brokers comes into play.

Example: Let’s say you predict that the EUR/USD currency pair will rise. You decide to buy (or “go long”) this pair. When you place this order, an A Book broker will pass this trade directly to the market, ensuring there’s no conflict of interest.

On the other hand, a B Book broker might take the opposite position, essentially betting against you. If your prediction is right, they stand to lose, creating a potential conflict of interest.

In the sections to follow, we’ll delve deeper into the operations of A Book vs B Book forex brokers. By understanding these dynamics, you’re better positioned to make informed decisions, ensuring your hard-earned capital is handled with transparency and fairness.

The Main Differences of A Book vs B Book Brokers

A-Book Forex Brokers

A-Book forex brokers, often referred to as STP (Straight Through Processing) or ECN (Electronic Communication Network) brokers, send all client trades directly to the liquidity providers or the interbank market.

In simpler terms, they act as middlemen without interfering or taking the opposite side of your trade.

Pros of A-Book Brokers:

• No Conflict of Interest: Since they merely pass your trades to external parties, they don’t profit from your losses.
• Transparency in Pricing: Prices are derived directly from the market, ensuring you get the fairest rates.
• Tighter Spreads: Often, A Book brokers offer competitive spreads, reducing your trading costs.

Downsides of A-Book Brokers:

• Commission Charges: To generate revenue, A Book brokers might charge a commission on trades.
• Slippage Might Occur: In volatile market conditions, the price you see might not be the price you get when the trade is executed.

B-Book Forex Brokers

B-Book forex brokers, commonly known as Dealing Desk brokers, take the opposite side of a client’s trade. In essence, if you profit, they lose, and vice versa. It’s like playing a game of darts; if you hit the bullseye, your opponent (in this case, the broker) misses out.

Pros of B-Book Forex Brokers:

• Fixed Spreads: These brokers often offer fixed spreads, which means no surprises during volatile market situations.
• Rarely Any Commission: Many B Book brokers don’t charge a commission, as their revenue often comes from traders’ losses.

Downsides of B-Book Forex Brokers:

• Conflict of Interest: Since they profit from your losses, there’s an inherent conflict of interest.
• Price Manipulation: Some unscrupulous B Book brokers might manipulate prices to their advantage.
• Potential for “Stop Hunting”: There have been instances where such brokers move prices briefly to hit stop-loss orders.

Hybrid Models

Some forex brokers don’t strictly fall into the A Book or B Book categories. Instead, they utilize a hybrid model, adjusting their approach based on various factors, including the trader’s profile, market conditions, and the size of the trade.

With hybrid forex broker models, a beginner trader from Kisumu, with a track record of losing trades, might be placed in the B Book, allowing the broker to profit from potential losses.

However, a seasoned trader from Eldoret, with consistent profits, could be routed to the A Book, sending their trades directly to the market and eliminating the broker’s risk.

Internal and External Hedging

Forex brokers, especially those operating a B Book model, might internally hedge their positions. This means that if multiple clients have opposing positions, the broker offsets them against each other, reducing risk.

However, if there’s a significant imbalance, the broker might externally hedge the position by taking an opposing trade in the open market, moving the risk from the B Book to the A Book.

Imagine a scenario where many Kenyan traders anticipate the KES to strengthen against the USD after a positive economic announcement. They decide to go long on the KES/USD pair. If a B Book broker has an overwhelming number of these trades, they might decide to hedge this exposure by placing a counter-trade in the A Book, ensuring they’re not overly exposed if the KES does strengthen significantly.