Understanding Your Broker’s B Book

Do some brokers trade against their own clients? Yes. Is it always a bad thing? Find out in this video.
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We have a quick question here from a subscriber saying that they’ve heard that some brokers trade against their own clients and wants to know whether this is true, and how it can be avoided. So thanks for the question, and please don’t ever apologize for questions like this.

It’s a real valid question, and we’ll be happy to share some thoughts on this matter. Also, keep in mind that I’m not an expert in all the nuance differences between brokers, some brokers might be slightly different, might have some slight variations on some of the things we’ll discuss, so don’t take this as a as a rule book, just take it as a general guide for how brokers normally work.

So the first thing that I think it’s important to mention right from the start is that there is a very real problem in the industry with unscrupulous brokers and they are real and it’s unfortunate that they only have one thing in mind and that is to rip you off by taking and trading against you.

But it’s also important to realize that not every broker that necessarily takes a counterparty trade against you is necessarily unscrupulous or trying to be dishonest, there might be a reason, a beneficial reason for them to do that.

Now before you jump up and rage for me saying that just give me a second to explain why. You see generally speaking, there’s two types of brokers you will get an A-Book broker and then a B-Book broker.

An A-Book broker is a broker that executes with STP or straight-through processing or something like an ECN which is electronic communications network. Now, the difference between STP and ECN is very subtle, STP, your order gets sent straight through to the interbank market and with ECN your order is tried to basically be matched up with the liquidity pools inside a electronic network. Now this is normally known as non dealing desk brokers.

Now, for most brokers or traders rather, this is considered as the best brokers to deal with because there’s not that conflict of interest between you and the broker because the broker doesn’t win when you lose that only make money from spreads and commissions, which is great. On the other hand, you also get B-Book brokers also sometimes known as market makers or dealing desk brokers. And essentially they act as the counterparty to all the clients trade. So, all the orders are processed in house from their own desk.

Now, for many this is a really bad thing obviously, because there’s a huge conflict of interest when your broker wins when you loses. And since they are the ones controlling the spreads as well as the commissions so if you have a very dishonest broker, they can manipulate or make the market to trade against you, and when you lose they win, and even if you win, they still win because they made money on the spread and the commissions. So just by weighing these two against each other you can see why you would want to be trading with an A-Book broker.

However, there is one snag which has led some brokers to make a more combined approach. So you see, the one setback with an A-Book broker is that your spreads can be very thin, which is great during high liquidity environments, but when liquidity is bad or dries up, your spreads are going to widen quite a bit and also keep in mind if your order goes through, I mean straight through into the interbank market and you trading something like a news in a very big, fast moving market news event, you’re almost guaranteed to get a very, very bad fall with those very big volatile markets because nobody’s gonna want to take that counter trade against you, and if you sell there’s probably gonna be a whole lot of liquidity already selling in that type of market.

So at least in that sense, a B-Book approach offers you some benefit as your order will almost always be guaranteed to get fulled as your broker is the counterparty. So, to try and compensate for this, some brokers have two trading books, so they’ll have an A-Book as well as a B-Book. Now that A book is the group of successful traders and the profitable traders and the B book is the group of unsuccessful or unprofitable traders or new traders.

Now the reason why the two groups are split is very simple. As a broker, you want to make sure that all the trades that are executed by your A-Book traders is sent straight through to your liquidity providers or straight into the real market also known as STP or straight-through processing as we said, but with the hybrid or combined approach, it means that all the losing traders are placed or combined into a B-Book, which is either sent through to liquidity providers or kept on their own books.

So when you join a retail broker depending on the size of your deposit, you will most likely form part of the B-Book group. Now, this might mean that your broker act as your counterparty, which is a conflict of interest, but if you’re a profitable trader, you can get far better falls on your broker if you’re trading from the B-Book compared to the A-Book. So there’s both pros and cons of both of them and it is the responsibility of each trader to do their own thorough due diligence with whom they trust their money with.

This is why we prefer not to recommend any brokers because a broker might be great today, and then suddenly the company is sold tomorrow and there’s new management that takes over and then everything changes. Or everything is fine and suddenly someone at the broker finds a way of stealing customers money, yes, these are extreme examples, but they do happen right?

And don’t forget that in 2017, one of the largest forex brokers in the world was shut down in the US, because they were telling the clients that they were ECN broker, but when they actually did the study, they found out that they actually acted as a B-Book broker by taking trades on their own books. Now the reason they gave for that was saying that, yes, they’re ECN because they try to match trades, but if they couldn’t match a trade quick enough in that electronic network, they took the order on their own books momentarily or temporarily, and then when eventually there was a counterparty they shifted the trade over.

So just because a broker looks great, you never really know what is going on behind closed doors, which is why the choice of broker is a very, very personal decision for everybody. Now the best thing that you can do, is know the difference, so make sure that your broker… ask them the important questions, how they execute their orders. If you don’t like the idea of a B-Book, then try and find a broker that is an A-Book broker, but keep in mind that those type of brokers are usually a lot more expensive for retail traders to join.

And always, always, always make sure that your broker is regulated and that they’re regulated in a credible jurisdiction, so this is very important, don’t trade with brokers that are not regulated, or even if they are regulated, don’t trade with them if they’re regulated in only dodgy jurisdictions. Also make sure that your funds are segregated, that’s a very important question, ask your broker about that.

That basically means that if the broker goes under financially like what happened to a few brokers after the SNB removed the Euro Swiss peg, a few brokers went bankrupt and the trading accounts in those brokers went bust as well.

So ask broker whether your trader funds are segregated and kept safe if the broker should go under. Now on a closing point, the one thing that I want to add is that, whatever you choose to do, don’t fall into the trap of blaming your broker for all the bad things that happen. Volatility is a real thing, variable spreads is a real thing. These things are going to happen everywhere, and no matter with who you trade with, they’re all gonna continue happening.

So of course, if you spot something really off, like you know, your broker hikes your spread with 100 pips, takes you out of the trade and then suddenly continues in the same direction seconds later and you look at other brokers and you don’t get that spike, obviously take your broker on about those things and because those things also do happen and they should be corrected.

But in general, if you are or if you’re trading with a reputable broker, focus on becoming a bit trader yourself. You can trade on 10 different brokers and you’ll have varying different results based on the spreads and the commissions yes, that is true, but don’t blame the broker for consistently losing money, right? That is usually down to over leveraging, bad trade management, a lack of trading experience or just, bad trade psychology.

So always keep in mind that the focus should be on becoming a better trader.

As I said, if there’s weird things happening then by all means just move to another one, but the broker is certainly not the cause for the majority of losses in the trading community. So I hope that helps, any other questions don’t hesitate to let us know.




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