Understanding How B-Book Brokers Differ From True STP Brokers

My transition from trading equities to Forex led me down an educational “rabbit hole” of sorts, which I have found is not entirely uncommon. Many traders are taken aback at a number of common practices in this industry that are designed to place the trader at a disadvantage, to the benefit of their broker. Perhaps the most earth shattering revelation for me came when I truly understood how B-Book brokerages actually trade against their clients. Knowing the rules of the B-Book game will help you understand how the interests of B-Book brokerages are truly at odds with the interests of the trader.

What does it mean when a broker runs a B-Book?

Before we address B-Booking, let’s consider the manner of trading familiar to most people.  If you’ve ever traded equities, futures or bonds, you know that once you place your trade, it is quickly ushered to the market, where it is placed with a buyer or seller. This direct market access is available in Forex trading too. In Forex, a broker that offers “Straight Through Processing” (STP) sends your order directly to their liquidity providers, which represent the Foreign Exchange Market. This process of Straight Through Processing is also sometimes referred to as A-Book trading. However, Forex brokers also have the option of processing trades off-exchange. In Forex, your broker can choose to keep your trades ‘in house’. In this scenario, your broker actually bets against you, taking the other side of the trade, rather than sending your trades to the real market. This is type of off-exchange trading against the client, is referred to as “B-Book” trading.

What would inspire a broker to run a B-Book against their valued customers?

Perhaps you haven’t heard the sad truth about the success rate of most retail traders? It ain’t a pretty picture. Take a quick tour of the internet and you’ll soon discover that those who investigate the statistics of retail (non-professional) traders typically quote the failure rate above 90%. That’s right, most of us retail traders have a pretty rough track record. That means that brokers who trade against their traders have a massive statistical advantage. Here’s another massive advantage: B-Book brokers don’t have to give themselves a margin call. That means that if you’re opening numerous trades, and some of them happen to go against you just the right amount to trigger a margin call, you’ll be forced to close positions at a loss. Your B-Book broker, however, has the ability to “ride out” the losers and close them at a more advantageous price. In essence, the B-Book broker can use the B-Book as a hedge against the trades you are placing. A former employee of a major B-Book brokerage once told me that there was a bell at the trading desk that was frequently rung in celebration when traders received margin calls. Those margin calls meant the trader lost big and the broker equally won big.

When you’re finished gasping, consider which option benefits you most. While some point to the fact that B-Book brokers are essentially guaranteed to fill your order, even in fast moving markets (often beneficial for traders who trade the news) these advocates often ignore the instances of massive slippage and re-pricing that are all too common in these circumstances. In light of the advantages that B-Book brokers have over their traders, one must remain wary of circumstances that place the interests of the broker at odds with those of the trader. B-Book trading is becoming ever more popular among brokerages, as it is incredibly profitable for them. Now, some brokerages have begun to employ a “hybrid” scenario, touting STP in their marketing, but then choosing to keep profitable traders on an STP trade execution, and placing less successful traders on the B-Book style of execution. However, recognizing this hybrid style of brokerage is a challenge. One often must do some digging to find evidence of this hybrid style of execution in fine print, where the brokerage admits that at times the trader may lose money on a trade while at the same time, the brokerage makes money on the trade in excess of the spread. You know what they say, “it’s all in the fine print.”

Of course, trading Forex can be incredibly rewarding, but it is also quite challenging. The last thing that a trader needs is to be treated as a target, and knowing that some brokerages all but dance on the graves of their lost traders will hopefully inspire you to learn more about how your broker operates.  Perhaps a brokerage that simply seeks commissions for executing your trades is an arrangement that suits you better. It only follows that a broker with this business model would benefit from your success and continued trading and therefore, has no need to play the tricks that are common among B-Book brokers, like re-pricing, slippage and execution delays.  I certainly sleep better knowing that my broker wants to keep me as a client over the long term and views me not as an opponent, but as a valued client.

Join the discussion 10 Comments

  • Jamey says:

    Thanks so much for your support! Glad you enjoyed this!

  • Donna says:

    Has anyone ever heard of the MT4 exploit plugin called the “Virtual Dealer”? It let’s a brokerage change all sorts of things on your trade. Frightening! Glad to know this broker is not using MT4!

  • dancome says:

    Hello ~ Awesome article ~ Thanks

  • Richard M. says:

    How is a trader supposed to trust any other broker? This is upsetting but I am glad to know what’s going on behind the scenes. Thanks for writing this!

  • David Pooley says:

    Tell Me about it I was trading away and got myself in a hole with gold, well I had everything under control and this Broker gave me margin calls, for three days I just topped it up and all was on track for a turn around, phew a little sweating but all good. Weekend off . Then out of the blue they stopped the margin calls. I went to the computer and they had stopped out my account. Closed all my trades and run way with my money. It was not as if I did not know about B Booking I had already left another Broker for the all the reason above. But this so call honest Broker assured me they were legit and that I had me on STP, (straight through processing). A load of Bull, the day after, Gold turned around and shot back up I would have made a killing, It was very clear then I had been ripped off. There was only one reason why they stopped the margin calls, SO THEY COULD STOP OUT MY ACCOUNT and steal MY Money. I lost 35K overnight thank you “****” (name removed for legal purposes) white collar criminals, I don’t know how they sleep at night. When I took them to task the only answer they had was they reminded me they no obligation to give me margin calls, this was regardless of the fact right up till the last minute just before the price was going to turn, I was getting margin calls all the time. I have yet to find a honest broker.

  • Forex Book says:

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