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Billions lost to B-book brokers every month

Our ultimate goal is an industry that exists for the betterment of traders, not brokers. By raising awareness around the toxic B-book business model, we’re empowering traders to make more informed decisions.

Global Prime Fugazi

What is a B-book?

The term ‘B-book’ refers to a dealing model used by Forex and CFD providers that aims to profit from their clients losses. It does this through a process of classifying and segregating traders into different books; ‘A-book’ for profitable traders and ‘B-book’ for losing traders or prospective losers.

Since trades in the B-book are not hedged in the underlying market, the traders loss becomes the brokers win. Basically the same as a casino.

Profits are contingent on clients losing

B-book brokers care about the bottom line above all else and this informs how the majority of decisions are made. This creates an unavoidable conflict of interest since the profit of the broker is contingent on the clients losing.

This makes compliance with financial services laws impractical and it becomes a game of what the B-book broker can get away with, not how they can operate a clean and ethical financial services business that exists for the betterment of consumers.

Dealing Desks

Dealing desks are the heart of the B-book model. They manage client orderflow, profile clients, switch traders between books, determine trade execution settings, and more. Some are ‘ok’ while others are unscrupulous in their pursuit of client losses and turbocharged profits.

A-book vs B-book Liquidity

B-book brokers focus on earning profit from clients losses rather than properly managing their liquidity and execution to get the best outcome for all clients. In their defence, it makes little sense for them to focus on a business activity that accounts for less than 5% of revenue.

Why is a B-book broker's external liquidity poor? Why does poor external liquidity (banks, ECNs, etc..) benefit B-book brokers? Where do B-book typically source their liquidity from? Do external liquidity providers run B-books for them also?

Trading conditions designed to blow trading accounts

B-book brokers offer enticing trading conditions to lure in unsuspecting traders looking for the best deal. Little do they know, the trading conditions are designed to encourage over trading, over leveraging, and spectacular account blow ups.

How does high leverage lead to overtrading and account blow ups? Why does a low margin call/stop-out ratio cause more losses? What strategies hurt B-book brokers? What Kind of restrictions do B-books place on traders?

Client profiling

B-book brokers maximise their profitability by proactively moving clients between A-book and B-book using a process referred to as ‘profiling’. Profiling is the process whereby traders are analysed using a broad spectrum of criteria to determine whether they are a good or bad trader and therefore likely to win or lose and over what time horizon. Bad traders go into the B-book so the broker can profit from their losses, while good traders go into the A-book, where the broker does not stand to make a loss if the trader wins.

Are market making and B-booking the same thing?

CFDs were designed to improve market access for retail investors by offering non-standard contract sizes and terms across a broad range of markets. Contracts like the DAX, VIX and EURUSD are able to be traded from tick values of dollars and cents thanks to CFDs. This is a real win for retail traders.

What is market making and how is it distinct from B-booking? Is a B-book broker a market maker? Are B-books required for CFDs and market access? Do market makers and B-books warehouse risk the same way?

Market and credit risk with funny money

Extreme market movements cause losses and negative balances for traders. Managing these is central to a brokers market and credit risk strategy. The exception to this is of course B-books.

B-books operate on the assumption that traders will eventually lose and this informs their attitude towards risk. Rather than address it, they simply accept it, and say that since they’re on the other side of the risk (the trades), there is no need to address it. Afterall, it's just ‘funny money’ that will never be paid out; ‘because they’re addicted’.

Global Prime Fugazi

Series Finale pt 1 - Key problems with B-books

  • B-books promote boiler rooms and nefarious activities like "Kill your clients"
  • B-books screw clients when they are switched from A-book to B-book or vice versa without notification
  • B-books target ‘dumb money’ with huge marketing budgets and with high leverage to blow their accounts
  • B-books profit from mispriced ticks, bad pricing from LPs, stop-hunting as they earn the losses of affected clients
  • B-books have not spawned any innovation apart from binary options which were an absolute disaster
  • B-books encourage dishonesty which can be proven by brokers not disclosing and outright lying about their dealing models

Coming Soon

Series Finale pt 2 - What all Forex and CFD brokers should disclose to traders

  • The dealing model they use - A-book or B-book - different terms to these would make sense...
  • The ultimate counterparty to the trade - if this is a group entity then its dealing model should be disclosed, i.e. is the group entity running a B-book for them.
  • Any arrangements in place with trading counterparties - Do they charge commissions or pay for order flow and run a B-book on their behalf.
  • Conflicts of interest - Prominently disclose B-booking and its key characteristics as a conflict of interest.
  • Client profiling - Whether client profitability and trading behaviours are used as a determinant for hedging strategies
  • Switching between books - Traders should be notified if they’re being switched between books and how this will affect their trades
  • Whether trade execution is instant - Filters and delays imposed by brokers to slow down execution on B-book trades should be disclosed
  • The mode of execution - Whether trades are automatically executed - STP and NDD.
  • Real transparency over execution - proof of the above with trade receipts

Coming Soon

Frequently Asked Questions

What is a B-book? Right Arrow

The term ‘B-book’ refers to a dealing model used by CFD providers/Forex Brokers that aims to profit from traders losses.

It is distinct from other dealing models in that it aims to profit from traders losses through a process of classifying and segregating clients into different books; ‘A-book’ for profitable traders and ‘B-book’ for losing traders or ‘prospective losers’.

There are two types of B-books:

Pure B-book - Where all market risk is held internally and managed internally by the broker.

Hybrid A and B - A combination A-book and B-book, whereby profitable clients are hedged while unprofitable clients are not.

What are the key features of a B-book? Right Arrow

  • 1:500 leverage - only B-book brokers offer such high leverage
  • Trades are not executed with liquidity providers (not ECN/STP) they are held by the broker for maximum profit
  • High exposure to and tolerance for market and credit risk
  • Dealing desk - automated or manual
  • Hedge execution decisions based on client profitability through client profiling
  • Emulate real market execution - artificial slippage, execution delays
  • No transparency or disclosures around dealing model and conflicts

What is an A-book? Right Arrow

A-book refers to a dealing model used by CFD providers/Forex Brokers that connects traders to the market. It is synonymous with the terms - DMA, ECN, STP and NDD.

There are two types of A-books:

Pure A-book - Each and every client transaction is automatically perfectly hedged with a counterparty.

A-book net - Client transactions are netted off and the entire remaining market exposure is hedged with a counterparty everytime.

What are the key features of an A-book? Right Arrow

A-books can be distinguished by their key features which include:

  • Does not (aim to) profit from clients losses
  • Externalises market risk
  • No/low exposure to market risk
  • DMA, ECN, STP, NDD
  • Low leverage - usually 1:100
  • Low exposure to credit risk
  • No client profiling - 100% A-book
  • Does not makes hedge execution decisions based on client profitability
  • Real market execution
  • Complete transparency around dealing model

Can a B-book broker make money if its clients are profitable? Right Arrow

A B-book requires trades to lose in order to make money.

The profit on winning trades is offset by the losses on losing trades and the net result is the broker's profit. If clients are net profitable then the B-book is net down and losing money.

How does a B-book make money? Right Arrow

B-book broker profits are generated from a traders losses by taking their trades onto the brokers books and not offsetting it with a liquidity provider or in the underlying market for that product.

Since the trade is not offset (not hedged), the broker wins when the client loses and the broker loses when the client wins. This is the same as a casino where the player versus the house.

Do B-book brokers make money from spreads or traders losses? Right Arrow

Contrary to what B-book brokers tell stakeholders and regulators, profits are not generated from the bid/ask spread. If a trader opens and closes their trade at the same price, inclusive of a 1 pip spread, the profit for a B-book broker is zero in spite of the 1 pip of spread revenue earned on the trade. If the trader closed the trade at -0.1 pips then this would be the profit for the broker, and not the 1 pip of spread on the product.

Profit in a B-book model is contingent on the equity of a trader's account dropping through trading losses. Even when there are US$ 1 million in commissions charged on the B-book, if there is no corresponding decrease in client balances because the traders have ‘broken even’ (gross trading gain and net break even) on their trades, then the B-book and the broker has made nothing. By contrast, the A-book model is not reliant on traders losses. It charges commissions and hedges all risk, removing the need for the client to lose for them to make money.

Can a B-book be ECN, NDD, STP? Right Arrow

No. B-books internalise trades which mean they cannot be considered ECN, NDD or STP. These terms are synonymous with the A-book dealing model and the removal of conflicts of interest by focusing on best execution.

B-book brokers commonly use terms such as ECN, NDD or STP to mislead clients into thinking they are doing the right thing with their trades and that they’re not profiting from their losses.

Around ~98% of all Forex and CFD providers run a B-book but when have you ever seen language on their website that would make this clear? Likely never. They’re all happy to use ECN, NDD and STP to throw you off the scent!

Is ECN pricing the same as ECN, STP and NDD? Right Arrow

No. B-book brokers use the term ‘ECN pricing’ to distinguish their pricing from their execution. It's a cute way to mislead clients into thinking they are an ECN broker. ‘ECN pricing’ simply means the broker is taking an ECN price feed but not using the ECN for execution. They are therefore not ECN, STP or NDD and they are running a B-book.

Is B-book execution better than A-book? Right Arrow

B-book brokers focus on earning profit from clients losses rather than properly managing their liquidity and execution to get the best outcome for all clients. While B-book brokers can make their execution as good as a demo account at their discretion, why would they give away free money? A B-books goal is to emulate real market execution until it's not in their interest to do so. Therefore is it really better if it's not scalable and only works for losing traders?

Is A-book liquidity or B-book liquidity better? Right Arrow

Excellent liquidity is not in the B-book brokers interest. One of the hedging strategies used by B-book brokers is ‘percentage controlled warehousing/B-book’, whereby a percentage of the trade is split between A-book and B-book. The goal of this strategy is to simulate ‘real market execution’, thereby creating slippage to increase the likelihood of trading losses.

If the underlying liquidity is good then this strategy for inducing trading losses will not work as slippage will not increase. Therefore it is not in the brokers interest to have excellent liquidity and good A-book execution. Given B-book brokers treat their liquidity like an exhaust pipe for ‘toxic flow’ only, the likelihood of them ever having decent liquidity and execution is unlikely.

Where do B-book brokers prices come from? Right Arrow

B-book brokers simply need a competitive ‘price feed’ that they can use as the reference for executing their B-book trades. The liquidity doesn’t actually have to be real or work… This works fine for losing trades that are internalised/B-booked but can be disastrous for profitable trades that go to market/A-book.

B-book brokers wanting to appear competitive will actually show their clients fake prices by either streaming price feeds from counterparties who they dont have relationships with or they will simply mark-down their prices. As an example they may mark-down EURUSD to have a 0.0 pip spread rather than the 0.2 pip spread they’re getting from their trading counterparties. This isn’t a discount like you see in a store, when the trade goes to market/A-book they would have immediate slippage, increasing the costs to the trader.

What is market risk? Right Arrow

Market risk is the risk of losses on financial products and investments caused by adverse price movements. B-book brokers have market risk when they internalise their clients positions and don’t hedge them with liquidity providers or in the underlying market.

Market risk for a B-book broker is therefore the risk of losses from client winning.

How do B-book brokers manage their market risk? Right Arrow

The simple answer is, they don’t. The assumption for all B-book brokers is that clients always lose and therefore there is no real market risk attributable to market risk exposures. Excess exposure is internalised and is only looked at twice if clients winning begins to hurt.

Since a B-book broker's only mechanism for managing the credit risk arising from high leverage (1:500) and low margin stop outs is to internalise (B-book) it, they have no real means of addressing market risk. If they do hedge their market risk with trading counterparties then this opens them up to significant credit risk (from negative balances).

How much market risk do B-book brokers have? Right Arrow

B-books will typically have Net Open Positions (NOP) of 5 times their total client balances. If a B-book has 100 million in client balances then their NOP would be expected to be 500 million USD. If they hedge 10% of client positions then the total B-book NOP would be around 450 million USD.

When markets are directional and more volatile, the NOP tends to grow to as high as 10 ten times the total of client balances. This would mean exposure of 1 billion USD per 100 million of client balances.

There is no balance sheet to NOP requirement for Forex and CFD providers. This means they can take on unlimited market risk relative to the balance sheet. If these clients are on 1:500 leverage then this magnifies the risk of this model.

Can a broker go bankrupt trading against clients? Right Arrow

Yes. It's more prevalent with smaller less regulated brokers but it can happen to large brokers also. A great example of this is a listed B-book CFD provider who famously lost ~103 Million during the Cryptocurrency boom at the end of 2017. The high stakes game of ‘close your eyes and pray for the best’ method of risk management is a ticking time bomb for the Forex and CFD industry.

What is credit risk? Right Arrow

Credit risk is the risk of loss that arises from a debtor or borrower failing to meet their obligations to a creditor/lender. For market participants, this means a principal defaults and is not able to to meet its obligations to its trading counterparties. In the case of retail traders, this usually emanates with a client incurring a negative balance and then not paying this back to the broker.

Why is credit risk high for B-book brokers? Right Arrow

Credit risk is affected by the likelihood of that event occurring. B-book brokers who offer 1:500 leverage and low ‘margin stop-out’ levels have a high likelihood of negative balances from their clients trading activities.

Herein lies one of the greatest ironies of the B-book model. B-book brokers deliberately give trading conditions such as super high leverage which encourage clients to blow up. Instead of addressing the cause of the risk like any normal financial services company (reducing leverage/increasing margin, reducing exposure, and requesting more collateral), they simply accept that it is a risk and say that since they’re on the other side of the trade (the risk), there is no need to address it, since it's just ‘funny money’ anyway. By failing to address the risk, B-book brokers are encouraging traders to lose.

What is a market maker? Right Arrow

A market maker is a market participant who actively quotes two-sided markets in a security, providing bids, offers, and volumes for each. In doing this they play the critical role of holding and transferring risk between market participants, thereby reducing market bid/ask spreads, improving depth of book and reducing transaction fees.

Examples of market makers are tier-1 banks like Goldman Sachs and JP Morgan or non-bank market makers like Citadel or XTX markets who all quote Foreign exchange prices.

Is a B-book broker a market maker? Right Arrow

B-book is the term for risk warehousing the orderflow of specific clients. The process of classifying and segregating clients into different books; ‘A-book’ for profitable traders and ‘B-book’ for losing traders or ‘prospective losers’ is unrelated to the processes and functions of ‘market making’ as described above.

Market markets have position size and risk limits that inform how much they can quote in any market and how fast they must get out of that risk. This is dissimilar to B-books that don’t typically have position and risk limits. B-book brokers know who the client is and are ‘trading against’ the profitability of the account like a casino taking on a gambler.

B-books share more features with casinos than a market makers with real risk management.