It is essential to understand the difference between different types of Forex brokers to succeed in trading.
Many brokers present themselves as ECN brokers (the A-Book model), but it is clear from their trading conditions that they are not connected with Electronic Communication Network.
Other brokers present themselves as STP, being in fact common Dealing Desks or kitchens. After all, a B-Book kitchen scheme does not always mean a scam, so do not hurry to put labels.
This article deals with different types of order processing models. I will explain A-Book and B-Book models, the difference between them, and why the B-Book is not always bad. You will also learn the difference between DD and NDD brokers and get acquainted with NDD order processing sub- types – STP, ECN, DMA, and MTF. I hope it will help you choose a reliable broker.
The article covers the following subjects:
What types of Forex brokers and order execution models exist?
Have you ever thought about how Forex trades are executed? From the trader’s point of view, it looks quite simple. You only need to click on the button to open an order, and a confirmation of the transaction appears on the screen.
But who is the counterparty for this trade? Is trade carried out at all? What determines the transaction execution speed?
There are two types of broker operation mode, A-Book and B-Book models. These models transfer the client orders to the interbank forex market in entirely different ways.
Moreover, the A-Book and B-Book models utilize different technologies of order execution, depending on the sub-type, MM, NDD, STP, ECN, DMA, MTF.
They also have different operation technologies: ECN-systems and MTF-systems.
Let us explore all these complicated abbreviations. It won’t be easy, but it will be very informative!
A-Book and B-Book models of managing client’s orders
To execute a transaction, there must be a counterparty in the foreign exchange. If someone buys an asset, then someone must sell it. A-Book and B-Books models differ in terms of the counterparty and its source:
A-Book brokers forward the trading orders to the liquidity provider, which then redirects them to the interbank market. The broker’s earnings are commissions for a fixed volume of transactions (as a rule, for 1 lot) or a markup on a spread. The broker in this scheme is only an intermediary; the final counterparty to the transaction is also a trader, whose opposite trades are in the interbank market or a liquidity provider.
- B-Book brokers process their clients’ orders in house and act as market makers. There is no external liquidity pool, as the broker executes trades internally. The B-Book model is also called a kitchen, but everything is not that simple.
There is no conflict of interest in the A-Book model. The broker is just an intermediary in providing financial services. Such a broker will benefit if the trader increases trading volume and turnover, as the commission charged by the broker will also increase.
The B-Books model is often associated with a scam, as the broker acts as the counterparty to fill the trader’s order. Obviously, there arises a conflict of interests; the broker is not only an intermediary but also a counterparty. Therefore, the company could set non-market quotes in the terminal, see the client stop-loss orders through the MT4 added software, and trigger stops with the plugins in the server part of the platform. Thus, such a broker could do everything to make the trader lose the money.
However, many brokers use the B-Books and do not even hide it. The matter is that to bring…