The brokerage industry is quite complicated, especially for a beginner in Forex trading.
In simple words, you can only get access to the market through your broker and Forex is the only market where the broker can trade against you.
But before we get started you may want to visit our Trusted Brokers page, verified and recommended by our professional mentors.
Firstly, let’s explore the different types of Forex brokers, which are structured in two different forms:
A-Book broker sends all your transactions directly to the interbank market. This type of broker doesn’t care whether you make or lose money. He will get the commission by charging a small fee per trade or transaction, and sometimes by increasing the spread from the interbank market.
On the other hand, a B-Book broker acts as the liquidity provider, which means your transactions will not be sent to the bank at all. The broker himself will guarantee his capital for you. For example, if you earn $100, the broker will lose $100 and vice-versa, so the broker takes profits from the trader’s losses.
As expected, these brokers have thousands of clients all over the world and the traders are classified into two forms:
The profitable trader who is making profitable and consistent gains.
The losing trader who will make consistent losses.
It’s crucial for the broker to know if the trader will be a loser or a winner, so they employ a quantitative research statistician (known as the quant guy). Basically, their job is to build fancy statistical models that define the features of a losing trader.
Usually, they will look through your trading history and identify your stops, the times of the day that you’re trading, the number of trades which will help them visualize how you’re likely to perform.
If based on this analysis you are a losing trader, they’re going to funnel your orders into the B book.
On the other hand, the quant guy may identify you as a profitable trader, so he assumes that you’ll make money in the long term.
How does this affect you?
In fact, you’re pretty much unlikely to know whether your trades are going to be placed on the A book or the B book. Although, it would be nice to know if you are on the B book. If these highly sophisticated quant guys deemed you as a loser, you may want to change your approach.
Do the B book brokers whos taking the other side of the trade, always make money?
No, of course not.
They will have their losing periods when traders become profitable, usually during the trendy markets.
Also, this industry has a special type of broker, which is known as the dealing desk broker, or the market maker. They are basically B book brokers which are wrapping a price around the interbank market price and will give you a fixed spread. There’s no commission charged with a dealing desk broker and he will make his money on the spread and your expected losses.
If the broker constantly loses substantial money by taking the other side of your trade, he may not want your business going forward.
A dealing desk broker is more likely to face accusations of unfair execution because he’s filling your orders with total discretion. Your losses are their gains, but more importantly, your gains are their losses. This could affect the executions if you’re trading with a notable size.
In the end, you need to know that if your broker is regulated, it’s highly likely they’re not going to be corrupt. They’re not out to get you and they’re not desperate to fill your stocks.
Many failed traders believe that it is a conspiracy theory and that the brokers are evil. The true fact is the reason why traders fail is not because of the broker, but because of the trader.
As always if you liked this blog, leave a comment below. Until next time happy trading and good luck! I hope to see you in the Trading Room.