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A Book or B Book Broker – What Broker should you open?

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Since the first ones opened in the mid-1990s, online brokerages have undergone massive changes. Several aspects have remained constant throughout the industry’s ups and downs. The model you use for your brokerage is one of the elements that remain unchanged. More options are now available due to technological advancements that were not available only a few years ago.

A Book or B Book?

“Unlike share trading, which is limited to one exchange, forex trading can be quite complicated technologically,” says the Head of Customer Success at OpenForexBroker, a leading brokerage solutions provider. “Access to a variety of liquidity providers is required for Forex brokers to be able to provide good and quick fills for orders placed. OFB Liquidity is a complete liquidity system offered by us, that connects our clients to over a dozen top liquidity providers via high-performance technology.

However, depending on the option, the integration of these services may differ. There are two types of integration to choose from: an ECN straight-through processing (STP) integration and a market maker integration. The STP model allows for direct execution of an order, allowing the trader’s order to go directly through and be filled. The orders are routed directly to a liquidity provider, who is one of the A book brokers, and filled. Because the broker is directly facilitating the trade, this method provides greater transparency.

There are several benefits to the broker for this method. The first is that the broker’s profit or loss is unrelated to that of the trader. Their revenue is derived from spreads generated by trading volume because they are merely facilitating the trade. In short, the STP will profit from the number of trades rather than any profit or loss from the trades themselves. This leads to the second benefit: their role as facilitators reduces their risk because they do not directly act as counterparties to a trade, reducing their need for stored liquidity and market exposure.

The market maker model differs from the STP model in that it acts as a B-book broker, which means that it is the liquidity provider or counterparty to the trade. They frequently use a dealing desk to manually screen and place orders, or they use software to send the order to be filled on the ECN. Because the market maker has a position in the market by acting as its own liquidity provider, its revenue is influenced by the profits or losses of its traders. As the counter-party, the trader’s loss becomes their profit. Because the majority of traders’ positions are losses, this can provide a better return than trading volume profits. However, the risk profile is higher, and with both positions and liquidity in the market, this model is vulnerable to massive risk, which is not possible in an STP scenario.

From the standpoint of a trader, the STP model has significant advantages over the Market Maker model. The trades are sent directly to the market, ensuring that the position is filled as soon as possible without the need for manipulation. Slippage and poor filling are eliminated in the trader’s mind by an STP model. The STP model also allows for lower costs because it runs automatically due to the lack of intervention and simple activity. With its complex risk management, liquidity oversight, and portfolio structure, the alternative market maker model necessitates manpower, which is reflected in the cost passed on to traders. As a result, STP providers can generally undercut market makers with lower-cost offerings, which benefits customers greatly.

However, because market makers can make more money by acting as a B-book liquidity provider, they are more profitable than pure STP providers. Most brokers will provide a number of different structures. Many traditional market makers began to offer STP ECN options in recent years as they lost market share to less expensive STP providers.

Furthermore, there is the possibility of a hybrid market maker model in which some orders are routed to A-book execution while others are processed through B-book positions. “The hybrid model gives brokers the best of both worlds: the stability of A-book execution and the higher profit potential of market making,”   It’s the perfect combination of liquidity and risk management, giving the broker control over massive amounts of simultaneous trades while also ensuring accuracy and reducing exposure.

The advantages of an STP offering are numerous, but the decision on which model to use is more dependent on which competing factors will provide the greatest benefit to your brokerage. The good news is that there are numerous variations among the two main options discussed above that will allow you to tailor the system to the needs and interests of your brokerage.