Why B-Book Forex Broker?

When you open a trade with the B-Book forex broker, that broker executes the other side of your trade and does not hedge.

The broker keeps the trade “in-house”.

Remember that if your broker executes the other side of your order and does not hedge it with a liquidity provider (LP), they are taking 100% of the risk associated with your order.

This means that if the client's trade loses $1,000, the broker earns $1,000.

But if the client's trade wins $1,000, the broker loses $1,000.

Since the broker can still lose, doing B-Book seems risky.

Why do B-Book brokers take the market risk and lose money？

Because most retail traders lose money.

Think about it ...

About 7489% of retail accounts lose money when trading forex.

This means that 7489% of retail forex traders are wrong.

With such clients, the broker considers this the equivalent of playing a “Tops” game and betting “Tops” with a coin that will land on “Tops” 7489% of the time!

If you know you'll be on the winning side at least 74% of the time, why don't you bet this？!

The odds will definitely be in your favor that you will win the bet.

Now imagine that you are a forex broker and you know your clients are wrong 70% of the time, do you want a B-Book？

I'm sure you'll take the chance!

It's even better than betting on black while playing roulette!

If the broker wants “STP” or “A-Book”, they also have to pay the difference to the LP to cover your trade. This means they have to spend money to support themselves.

But why cover up if most customers will lose？

“B-Book” brokers trade because it is usually more profitable for them.

How B-Book brokers make money

You buy from a broker and sell to a broker. If you win money then the broker loses money and vice versa.

This means that when you lose, the broker takes a profit.

And if all you do is keep losing, the broker is slowly taking more and more money than you originally deposited into your trading account.

Retail traders tend to act like gamers, and a B-Book broker acts like a “house”.

Most new retail traders have no trading experience and it is not uncommon for 80-90% of them to lose their entire deposit within 12 months.

There is even a popular rule known as the “90/90/90 rule”. This rule says that “90% of new traders lose 90% of their money in 90 days”.

We don't know how precise the rule is, but whether it's 90 days or 12 months, imagine being a B-Book broker with these clients.

All you have to do is sit back, relax...and WAIT for your customers to die, then watch your profits start pouring in.

To give a simple example, this is how much a B-Book broker makes in a year, assuming an average deposit of $1,000.

Although the average deposit of $1,000 may be considered small, you can see that being a B-Book broker can be extremely lucrative!

It can be even more lucrative if brokers can get their clients to deposit even larger amounts.

Now… just because B-Book brokers make a profit when their clients lose doesn't necessarily mean they WANT their clients to lose.

Yes, it benefits B-Book broker if you lose, but all the hype about every forex broker B-Book trades against you or is propaganda made by A=Book brokers want to “take market share” or traders refuse to entertain the idea that they may in fact lose because they are just trading badly. If a broker has only one customer and uses B-Book to do it, then they obviously don't want trades made by their ONLY client to win. This means that the broker will always be on the losing side and result in an unprofitable trade. So yes, in this particular case the broker wants their only client to lose.

However, brokers don't just one client, they have many clients.

What B-Book brokers really WANT is to pocket the spread AND no need to hedge (because hedging costs money).

The problem is that since the broker is doing the opposite of their client's trades, they have to bear the risk of being on the losing side of the trade.

And if they don't want to take this risk, they have to arm themselves unless...

What B-Book Brokers Like

A large number of similarly sized clients.

B-Book brokers want a large number of similarly sized clients who trade as often as possible and open long and short positions in equal amounts so that the broker can reverse each one of their transactions.

This allows the broker to pocket spreads on both sides without incurring market risk, as positions have been cleared.

For example, retail trader A wants to buy 10,000 units of GBP/USD, so the broker offers an asking price of 1.4105. At the same time, retail trader B wants to sell 10,000 units of GBP/USD so the broker offers a bid price of 1.4103.

So the broker buys GBP/USD for 1.4103 from retail trader B and sells GBP/USD for 1.4105 to retail trader A, pocketing 0.0002 or 2 pips from the spread.

Since both orders are the same size (10,000 units), they offset each other and which means the broker is not exposed to any market risk!

The broker would love to do this a gazillion times a day.

Loves fishes, but not whales.

B-Book brokers arent fond of high rollers or “whales”.

In gambling lingo, a high roller also referred to as a whale, is a gambler who consistently wagers large amounts of money at a casino.

If you think of a B-Book broker like a casino, it doesnt want a customer that trades so big that any individual bet exposes the broker to so much market risk that it could cause it to “go bust” or “take the house down”.

What B-Book brokers prefer is that their customers trade in similar position sizes AND trade frequently.

For example, itd prefer to have 100 customers all trade, on average, 5 mini lots than have 98 customers who trade 3 mini lots and then have 2 whale customers who trade 20 standard lots at a time.

This allows the broker to offset trades with each other rather than exposing itself to market risk.

Also, this reduces the capital that a broker needs to set aside (which would be used to pay out winning trades) because its customers are essentially, “making a market” for each other.

What B-Book brokers love the most is when their customers are constantly trading and are not winning too much, nor losing too much.

The ideal scenario for a B-Book broker is where half its customers open long positions and the other half open short positions. And that their customers trade these opposing views frequently.

This would mean that all positions offset each other and the broker is not exposed to any market risk so little capital is required by the broker because any gains itd have to pay to winning traders would be paid with the losses from the losing traders.

The broker would just constantly make money from the spread (and overnight financing charges) and not have to worry about going bust.

What B-Book Brokers Dont Like

B-Book brokers dont necessarily like customers who win consistently.

These customers will grow their account balance over time, allowing them to open bigger and bigger position sizes.

Eventually, they become too big and risky for the broker that their orders have to be hedged (A-Booked).

Remember, hedging costs money. And since the trade is now hedged, the broker wont make money if the customer loses anymore. So its revenue is now limited to pocketing the spread (and overnight finance charges if the traders leave their positions open overnight).

They also dont like traders who are too good because the trader is taking away money from their other customers.

A B-Book broker prefers that those profits are passed around more evenly among its customer base since it allows them to continue pocketing the spread from a larger pool of traders.

This is all fantastic news for brokers who run a B-Book, but its not so fantastic for brokers that strictly run an A-Book.

Every time an A-Book broker sees a losing customer, it is potential profit that is now lost forever.

With such a high percentage of new traders blowing their accounts, and the universe of new traders being finite, it is questionable if a strictly A-Book approach is sustainable in the long term.

It‘s an extremely tough business for a retail forex broker to operate as 100% A-Book. It’s hard to make a lot of money and with margins so tight, its not surprising why brokers running a B-Book as an additional source of revenue.

That said, the B-Book model is considered challenging in terms of risk management. Especially, if you have lots of customers who open positions in the same direction and trade profitably.

If their customers win big enough, the losses for the broker could be enough to put the broker out of business.

This is the reason why most brokers use a combination of B-Book and A-Book execution, also known as a “hybrid model”.