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A-book vs. B-book execution pros and cons

How do brokers profit from the a-book model?

The pure a-book model offers a broker to execute 100% of trades on the liquidity provider side. By sending client trades directly to liquidity providers, brokers can benefit in several ways.

Mostly, A-book brokers benefit through spreads, which are the differences between the buy and sell prices of the financial instruments. As clients execute trades in the market, the broker captures a portion of the spread, generating revenue without being directly impacted by the client’s trading outcome. This aligns the broker’s interests with the traders, as their success translates into increased trading volumes and potential profit for the broker.

Transparent trading conditions foster trust and enhance the broker’s reputation, leading to client loyalty and potential referrals. However, it also entices a broker to increase spreads if they can benefit enough from the existing trading volumes, making them less attractive and competitive.

This model’s feature is that a broker does not have to manage any own liquidity – the only sources used are the liquidity from the provider, brokers’ technological environment, and staff. These conditions make an A-book model a simple choice for small brokerages without extended financial abilities.

How do the brokers get profits with B-book?

The B-book or risk-in-house model offers brokers to execute trades within their ecosystem using only market data from the provider. 

The part of a broker’s profits includes the funds lost by traders on unprofitable trades. Despite that, there are still other sources of profits, including spreads like in the A-book model. Surely, processing risks in-house may create a conflict of interest between the broker and the trader, especially if the broker provides clients with unclear trading conditions.

There is an evident risk for brokers using a pure B-book model. The more successful traders become, the more a company’s expenses rise. To balance it, the broker must attract new clients, escalate operational risks or increase commissions, again losing compatibility and becoming less attractive to existing and potential clients. 

A-book pros and cons

Pros:

  • Transparent trading conditions;
  • No own liquidity is needed;
  • Easy to launch.

Cons:

  • May cause slippages;
  • Liquidity may be expensive;
  • Very limited ways to get profits.

B-book pros and cons

Pros:

  • Fast execution under normal conditions;
  • Reliable execution despite available volume on the market;
  • Brokers may benefit when traders lose.

Cons:

  • Expenses rise as traders become better;
  • Losses decrease the lifetime value of a client;
  • Brokers get stuck in a cycle where the only way to earn more is to bring in more clients.

What is the best?

To mitigate operational risks and achieve a more balanced execution, brokers can adopt a hybrid execution model that combines elements of the risk-in-house model with hedging strategies. By implementing it, brokers may effectively manage risks and optimize their trading operations. 

  • The easiest to facilitate this transition is the multi-platform Liquidity Bridge. The solution empowers brokers to achieve a more stable and profitable trading environment while maintaining flexibility and control over their operations.
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