Broker Jargon Buster Part 1 - A Book vs B Book
If you have spent any time whatsoever in an online place that is dedicated to trading, you are almost certain to have read something along these lines: “Shiiit bruv, don’t trade with that bucket shop, they are a B Book broker, you may as well be playing in a casino!” Or similar.
The rights and wrongs of that statement are not within the scope of this article, but if you read that and thought ‘holy shit, that B Book thing sounds terrible, I must avoid it, but I have no bloody clue what it means’, then this is the article for you.
Like all niche activities, hobbies or businesses, trading has it’s own jargon. This is part one of a three part series. Hopefully it will shed some light on some of that jargon.
Understand the Game and the World You are Playing It In
This part 1 of a 3 part series aimed and demystifying the terminology that is thrown around about Brokers. The most important thing in trading is to have a demonstrable edge and utlilise it consistently for profit. The second most important thing is understanding the game you are playing and the world you are playing it in, and until you understand what the hell everyone is talking about, you aren’t going to understand the game.
When I say the game and the world you are playing it in, a big part of what I mean is the trading platform providers, the brokers, the liquidity providers and market makers - all of the organisations, bodies and individuals who make up the market infrastructure that enables you to click a button on your computer and place a trade.
A Booking vs B Booking
Part one of the three part jargon buster series covers A Booking vs B Booking. You will hear theses terms thrown around a lot and often it will be with a hint of derision (see my opening sentence).
The term refers to the manner in which your broker executes your trades and places them in the market. When you place a trade with your broker do they then take the other side of that trade, or do they pass it through into the wider marketplace?
Remember that these phrases are basically slang and there are descriptive or technical phrases out there, such as Straight Through Processing, Market Making etc...but that will all be covered in part 2 of this series!
A Book Broker Model
Related terms: Straight Through Processing (STP), Electronic Communication Network (ECN), No Dealing Desk (NDD)
If your broker is an A Book broker that means that they pass your order through to the real market and are not ‘making the market’ themselves. They act simply as the intermediary between you, the trader, and the liquidity provider.
The liquidity provider guarantees a certain price and ultimately acts as the market maker. (See Part 2 and Part 3 for more on liquidity providers).
The A Booking broker only makes money in either a commission or spread on your trades. If you lose or win they make the exact same amount of money on that trade regardless. They are a service provider who gets paid by the trader for providing that service.
- Broker is incentivised to have winning traders who keep trading so they keep making money on commission and spreads.
- Broker does not make more profit if you lose money. For some people this is massive and the only thing that matters
- You may experience more slippage
- Spreads and commission are often higher and spreads may widen in volatile markets as this is their only profit source
- It is impossible to know if your orders are actually being passed through to the market fairly (see FXCM scandal!)
- The liquidity provider is still acting as a market maker - you cannot avoid a market maker somewhere in your trade lifecycle as a retail trader!
B Book Broker Model
Related terms: Market Maker, Dealing Desk
If your broker is a B Book broker that means that when you place a trade with them they do not pass that trade into the real market. They put that trade in their own private liquidity pool.
Then, if you have a winning trade they have to pay you the money and if you have a losing trade they keep the money.
This is what leads some traders to suggest that a B Book broker is ‘trading against’ their clients. They quite literally lose if you win and win if you lose!
However, it is not quite as simple as that. We have interviewed representatives from numerous B Book brokers and they all insist that they make their money from the spread and that they hedge their client positions internally.
What this means is that, at any given time, they will have a number of people long EUR/USD and a number of people short EUR/USD, for example. Those positions are netted off against each other to a large degree, leaving a smaller exposure on one side of this trade depending on the weight of client positions. Equally, they then have the option of taking their own hedging positions in the market if they are heavily exposed one way or the other.
Whether you believe that your broker is incentivised to see you lose money or not is up to you to decide, but they tend to insist that it is not the case!
- Often you will get guaranteed or instant execution
- Spreads (or at least total trading costs) often lower, but not always
- Some of the biggest brokers with the longest history run a B Book. IG Index has the largest B Book in the world.
- Broker probably makes money when you lose (!)
- They often reserve the right to intervene manually in your trades (a Dealing Desk)
Hybrid Broker Model
Some people believe that the Hybrid broker model offers the best of both worlds. Other people, however, believe that it offers the worst of both worlds!
The Hybrid model is where a B Book broker will hold the trades of losing traders and pass the trades of profitable traders through to the market. How they decide this can either be on your track record or other statistics such as deposit size, use / non use of stop losses, leverage etc. (A an interesting aside, I read that statistically, the larger the deposit, the more likely the trader will be profitable, particularly once they hit $10,000 deposited).
Some people think that this is great, as it means they get the better trade costs and less spread widening associated with a B Book broker while they are learning to trade or only a bit profitable. And if they become a superstar trader then their trades will be put through to the market and the broker no longer minds that they are trading profitably.
For other people this means that your broker only loves you when you are losing and wants to get rid of any trader that makes money.
This latter group are also worried by what is known as the ‘toxic flow’. This is basically the concept that if a liquidity provider knows that a broker only passes through profitable traders then they may not want those trades themselves - because, of course, the liquidity provider is ultimately acting as the market maker. So you may experience trade rejection, slippage etc from the liquidity provider, which will ultimately look like slippage etc with your broker.
The model is massively popular with brokers because it is massively profitable. It enables them to make money off both losing traders and winning traders. Whether you think it works for you depends on your personal preferences.
- If you are a winning trader then your broker may not be losing when you win and is incentivised to see you continue to win
- You can take advantage of the lower cost of trading with a B Book broker
- You may be part of the ‘toxic flow’ to liquidity providers and experience slippage etc
- It may seem that it is entirely designed around the profitability of your broker not the service they provide to you!
Which is Best?
The most important thing to remember is that the person who decides whether you make money or not, is you. You pick the trading strategy and execute it. If your strategy sucks and you execute it like an amateur then you will lose money. If your strategy is completely mega and you execute it like a trading champ then you will make money. (Probably).
The impact that your broker has on this is minimal - they won’t make you a profitable trader if you aren’t already one and they are very unlikely to make a nicely profitable trader unprofitable.
But, as I said at the beginning of this piece, you have to understand the rules of the game you are playing. Decide what it is that you want from your broker and then find a broker that matches your requirements.
The decision on which is best is ultimately subjective. Pure A Book brokers make a strong case based on their impartiality. But if you are a scalper who only cares about getting instant execution and rock-bottom trading costs, then you may be better off with a pure B Book broker.
You could decide that, as a $2000 account holder, a B Book broker is unlikely to care if you are 10% profitable this year and since you like their platform you’ll go with them…
Or maybe you have a $250,000 account and you’d really rather not have your broker pass all your trades with the ‘toxic flow’, so you’ll go for a pure A Book broker…
Either way, the choice is yours. But first and foremost make sure you have a winning trading strategy!