When it comes to managing trades placed by your clients, there are two main ways to go about it. You have what is known as A-Book and B-Book models, and then you have hybrid brokerages that operate both. Some businesses operate more like traditional brokers, whereas others are comparable to bookmakers.
These models are where Forex trading differs from investing in futures or shares. That is because the broker can decide to trade against the client under B booking. We take a closer look at each of the models to help you decide which Forex business model is the right fit for your trading firm.
The A-Book model is also known as Straight Through Processing (STP). This model is less complicated than the B-Book model, which might work well for you if you have just started out in the Forex trade. Understanding what type of Forex trader you are can help you to decide whether or not this model will work for you.
In this model, clients place their trading orders through your platform, and the broker will send these on directly to the liquidity provider with the lowest spread or multilateral trading facilities (MTFs). With A booking, you make the same amount of money whether you are dealing with winning or losing traders. That means there is no conflict of interest.
To make money with this model, you can charge commissions based on the number of orders, mark up the spread, or use a mixture of both. You have more of an incentive to have profitable traders, as they are more likely to conduct larger trades, and so grow your profit.
With the B-Book model, the brokerage decides to keep the client’s trade internally. Brokers who use this model are also known as dealing desk brokers. They take on the opposite position of their traders and thus have a much more active role in the market. This type of brokerage is better suited to someone with more technical knowledge of the Forex market.
With this model, your profits are typically equal to your clients’ losses, which means you face more risk. However, it can also result in much larger profits than those obtained via the A-Book model. That’s because you can earn much more than just a small fee and actually stand to gain almost the total amount from the trader’s position.
To manage the risks involved with B booking, you will need to use risk management tactics. This can include things such as spread variation and internal hedging. The risks associated with this model, as well as the conflict of interest, leads many people to use a hybrid model instead.
Hybrid Forex Brokerage Models
Hybrid models are very popular, and it’s easy to see why. By operating both an A-Book and a B-Book, brokerages can select which trades are kept on their own book and which ones are placed with a liquidity provider. In this case, you get to increase your firm’s credibility, minimize your risk, and still be extremely profitable.
For any traders that are weary of dealing with B-Book brokers where you have a conflict of interest, you can offer STP trading. On the other hand, you may find that some traders are searching for the lowest possible spreads. These can be serviced using the B-Book model.
In order to succeed with the hybrid model, however, you need to be able to classify your clients and know which ones are best placed on your A-Book and which ones will fare better on your B-Book. If you need help to determine how to classify your traders, you can use industry risk management software to help you.
Generally, there are certain types of traders that are better serviced with the B-Book model. These are clients that do not place stop losses, those who use large amounts of leverage, those who trade small accounts that tend to be much less profitable, and those who risk a large percent of their capital on each trade.
Choosing the right business model for your Forex trading firm will ultimately depend on what type you feel most comfortable with. Of course, you will also need to take into account the fact that many will avoid using a firm that only operates a B-Book. Taking the various advantages and disadvantages into account will help you to make the right decision based on your needs.
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