A-book and B-book brokers explained.

When you press buy on one lot of EUR/USD, somebody has to sell it to you. That somebody is either a firm out in the wider market or your broker itself. The two answers are called the A-book and the B-book.

Both names describe who carries the market risk of your trade, the chance of losing money when the price moves.

Where does your order go after you click buy?

Every retail trade first lands at your broker. From there it can take one of two paths.

On the A-book, the broker passes the risk on. It opens a matching trade with a liquidity provider, such as a bank or a large trading firm, so a price move hits that firm and leaves the broker flat.

On the B-book, the broker keeps the trade. It becomes the other side of your position, so when you gain the broker loses the same amount, and when you lose the broker gains it.

Your platform looks the same on either path. You see a price and a fill, and nothing on the screen says where the order went.

How does each model make money on one trade?

The lesson on how forex brokers make money covered spreads and commissions. One worked trade shows how differently they land in each book. All prices here are illustrative.

You buy 1.00 lot of EUR/USD. Your platform shows a bid of 1.10000 and an ask of 1.10010, a spread of 1.0 pip. On one standard lot, 100,000 euros, one pip is worth $10.

1. You open at the ask, 1.10010.
2. In case one, the bid later reaches 1.10210 and you close. The result is 1.10210 − 1.10010 = 0.00200, which is 20 pips, or +$200.
3. In case two, the bid falls to 1.09810 and you close. The result is 1.09810 − 1.10010 = −0.00200, which is −20 pips, or −$200.

Start with the A-book broker. Say its liquidity provider quotes 1.10004 and 1.10006 at your entry, a spread of 0.2 pip around the same middle price, 1.10005.

1. The broker buys from the provider at 1.10006 and sells to you at 1.10010. That 0.4 pip markup is 0.4 × $10 = $4.
2. When you close, it takes the same 0.4 pip on the bid side. In case one the provider bids 1.10214 and you get 1.10210. In case two the provider bids 1.09814 and you get 1.09810. Either way that is another $4.
3. The broker's trade with the provider offsets the price move, the $200 either way. The broker keeps $4 + $4 = $8 in both cases.

The B-book broker has no provider in the middle. It holds the opposite position, so its result is your result with the sign flipped.

1. In case one you make $200 and the broker loses $200.
2. In case two you lose $200 and the broker gains $200.

Your $200 loss already includes the 1.0 pip spread you paid, so the B-book broker needs no separate line for it.

The A-book broker earns the same whether you win or lose, so its income grows with how much you trade. The B-book broker earns from your losses, so on each single trade its interest runs against yours.

Why would a broker keep your trade in house?

Sending every small trade to a provider costs money and adds a step. Many retail orders are small, and clients often trade in opposite directions at the same moment.

Say Client A buys 3.00 lots of EUR/USD while Client B sells 2.00 lots, and the broker fills both itself. The 2.00 lots on each side cancel, leaving the clients net long 1.00 lot and the broker short 1.00 lot.

Together the two clients hold 5.00 lots, worth $50 per pip. The broker's own exposure is the net 1.00 lot, worth $10 per pip. It can keep that lot as risk or hedge it with a provider.

Matching clients against each other like this is called internalisation, and it is one reason a B-book can fill small orders quickly and cheaply.

When clients as a group lose more than they win, the B-book pays the broker on top of the spread. When many clients win at once, for example in a strong move most of them caught, the broker pays out of its own capital.

That risk is why some brokers run both books. They may keep small accounts on the B-book and route large or steadily profitable ones to the A-book, a mix covered in the lesson on hybrid brokers.

Where does the conflict of interest show up?

A B-book broker gains when you lose. That alone is no proof of cheating, and many licensed brokers run a B-book within the rules. The incentive is real, though, so the warning signs are worth knowing:

• Requotes or rejected orders that appear mostly when the price has moved your way.
• Slippage that nearly always goes against you and almost never in your favour.
• Spikes on your chart that a second price feed does not show at the same time.
• Withdrawal delays or account reviews that start after a run of winning trades.

Regulation and reputation limit this behaviour. Many regulators require brokers to have an order execution policy and give it to clients, and you can complain to the regulator if a broker breaks its rules.

The lesson on checking a licence shows how to confirm who supervises your broker.

In some places, including the EU and the UK, brokers offering CFDs to retail clients must show the share of their retail accounts that lose money.

That figure on the broker's own site tells you how its clients tend to fare, which is the side a B-book profits from.

The A-book has its own pull. It earns on volume, so it benefits when you trade often, and its markup is a cost you pay on every trade whether it helps you or not.

How can you tell which model your broker uses?

Brokers rarely write B-book in their marketing. The legal documents tell you more than the homepage.

• Read the client agreement and order execution policy. Wording such as acting as principal or as your counterparty means the broker can take the other side.
• Watch the labels. Market maker usually points to a B-book, while STP and ECN describe orders passed on to other firms.
• Treat account type as a weak clue. Commission-based raw accounts are often routed outside, but the name alone proves nothing.
• Ask support in writing whether the broker acts as counterparty to trades on your account type.

One answer may not stay true. A broker that runs both books can move a client from one to the other, and nothing on your screen changes when it does.

Does the model change your results?

The model changes who profits from your trades. The price maths stays the same: a 20 pip move on 1.00 lot of EUR/USD is $200 on either book.

What you can measure is your cost per trade, the quality of your fills and how smoothly withdrawals arrive. A well-run B-book with tight spreads and clean fills can cost you less than an A-book with a wide markup.

The lesson on judging order execution shows how to test fills yourself. The next lesson looks at how A-book brokers earn and what limits that income.