A Book and B Book In Forex Trading & Why It Matters
Learn how trades are executed with A book and B book
Not many traders think twice about the execution of their orders when trading. Most focus on the more important things such as their trading strategy, leverage, and other conditions.
Once a trade is made, the only thing a trader is usually concerned about is whether or not their trade resulted in a profit. For most traders, A book and B book might seem like some technical jargon.
Given the fact that the so-called booking of trades is behind the scenes, most traders tend to miss this aspect.
In recent times, more and more traders have started to pay attention to how their trades are booked or processed.
A forex broker can execute your trades in a number of ways. And it is in your best interest to understand how the trades are processed. You might have heard the terms “dealing desk broker” and “no-dealing desk broker.” These terms refer to the execution of trades.
In this article, we take a look at what A Book and B Book mean in forex trading and why should pay attention to this.
What is an A Book in Forex?
A Book in forex is defined as a type of execution model that is STP or Straight Through Processing. You might have come across forex brokers who call themselves, STP broker, or an ECN broker or a non-dealing desk broker.
What this means is that a broker operating under this type of a model passes your orders directly to the liquidity pool. A liquidity pool comprises of a number of entities acting as a counterpart to the trades flowing out from your forex broker.
Of course, the only information they have is the price level at which you have your buy or sell orders.
With an A book broker, the forex broker does not act as your counterparty. For many traders, this is what matters the most – to be able to trade with a broker that does not have a conflict of interest when processing your orders.
An A Book broker usually charges a commission on the trades, known as the round trip lot. This is the fee you pay when you open and close a position.
The downside of A Book – Spreads
In some cases, brokers can also add an additional mark up on the prices to make an extra buck.
While A book brokers are usually preferred, there are some downsides to this as well. Because your orders are processed directly to the liquidity pool, you will witness variable spreads. The spreads can be very tight when liquidity is high but during low volume periods, the spreads can vary significantly.
This is especially visible when you trade some exotic currency pairs such as the USDNOK, EURZAR and so on.
During regular market hours, you can see the spreads on such currency pairs tighten. But, during off-market hours such as the early Asian trading session, you can see the spreads widen.
This increases the risks when you have open positions. Your stops or take profit levels can be abnormally hit due to the wider spreads. And, at times, you will certainly not get the best price execution.
What is a B Book in Forex?
When a forex broker processes your trades in-house (with a dealing desk), it is a B Book. In the case of a B Book, your forex broker acts as a counterparty to your trades. The B book broker goes by different names such as market maker or a fixed spread broker.
To explain this in simple terms, if you place a buy order, your broker will be selling to you and vice versa. Many traders are starting to doubt this type of forex brokers. The primary concern is that these brokers could potentially take advantage of your trading history and pattern and thus make a profit off you.
While this might be the case, there are some advantages that a B book forex broker has to offer. For one, you can get guarantee fills on your trades. Even when liquidity is low, you get a good execution of orders because your broker acts as the market maker.
Another point to remember is that a B book forex broker offers fixed spreads. This means that whether you trade during peak market hours or during off-market hours, a B book forex broker is more beneficial.
B book forex brokers typically charge a fixed spread which you pay for every time you open or close a position. This again has some advantages and drawbacks. For one, having fixed spreads makes it easier for you to trade when there are market shocks.
But at the same time, you will have to tweak your trading strategy to account for the fixed spread pips as well.
A combination of the above two is a hybrid model. This is where brokers can choose whether you put you into the A Book or the B Book. In this case, depending on various parameters and your risk profile, the broker can choose to pass your orders as STP or to treat them in-house.
In this scenario, you really wouldn’t be able to tell the difference. Traders who have small deposits but trade with high leverage are riskier and therefore such trades see B book execution. These are usually new traders who do not have the skills. Therefore, the chances that such traders lose money is big.
This gives the forex broker a better chance to make more profits by B booking you. You might still pay commissions and/or a mark-up on the spread, but this does not mean that your trades will go STP.
Which is Better?
The answer to this depends on what you are looking for as a trader. For example, if you were based in a time zone where your start of business day usually means that the rest of the world is sleeping, a B book forex broker that offers fixed spreads is a better solution.
But if you are in a timezone such as the European trading session which is very active, trading with an A book broker is more ideal. This is because you are most likely to get the best possible spreads due to higher liquidity.
Another factor to consider is the costs. Regardless of whether it is an A book or a B book execution, you cannot avoid costs such as spreads, commissions and overnight swaps.
In such cases, it is best to compare which of the two execution models are ideal for you. This allows you to make a more wise decision when choosing a forex broker.
In conclusion, there are many myths surrounding the A and B Book in forex trading. As you read above, both these books have their own pros and cons. Ultimately, it is up to you to decide what type of a forex broker you would want to trade with.
Just because a forex broker acts as your counterparty does not mean that they want to see you lose. Traders should pay attention to the fee structure, and other details which are important.
In conclusion, whether it is an A book or a B book, you cannot trade without a counterparty. The question is whether you see any distinct advantage between the two execution models.