Making b-book cool again!
Is b-book execution really that bad? Not if it is being done according to live pricing from liquidity providers and prime brokerages, and does not involve price fabrication or manipulation internally. Prominent industry figures and b-book advocates state the case for why b-book should once again be considered cool
B-book execution. Two very simple words that polarize opinion across the entire retail FX industry.
On one hand, it is associated with warehousing of trades by small brokers which do not transfer any orders to the liquidity provider, thus fixing their own prices, described as market-makers within the retail sector, and on the other hand, it can be a very effective risk management procedure.
In effect, a huge shift toward providing retail customers has been made toward executing orders direct to market, with agency model brokerages often treading a highly sophisticated balance between sending orders to an aggregated liquidity feed provided by a prime of prime (and ultimately executing at the bank) and internalizing orders during times of high volatility, but sticking as close as possible to the prices provided by the price feeds supplied by the prime brokerage.
This is a model which is indeed bona fide, and offers customers good quality execution backed up with risk management in times at which sending orders to the banks would perhaps increase the spread, not be filled due to low capitalization, or expose the trader to volatility which could create negative client balances.
The negative connotations that surround the word b-book are perhaps therefore a bit harsh, as there is a vast difference between legitimately b-booking trades – indeed most integration and bridge technology comes with integral liquidity management systems that allow brokers to b-book or a-book trades according to market conditions and the traders’ capital exposure, yet do so according to the correct prices.
There is, therefore, a vast difference between the word b-book order flow, and the operation of a bucket shop in which orders go into the ‘bucket’ and are bear no relevance to a live market.
To help dispel this further, FinanceFeeds spoke today to Markos Solomou, CMO at easyMarkets, who enthusiastically said “Let’s make b-book cool again!”
Mr Solomou, who holds a Batchelor’s Degree in Business and Finance from Kingston University in Britain, and is a member of the Institute of Chartered Accountants in England and Wales, began his career at professional services consultancy PriceWaterhouseCoopers befoe joining EasyForex (now easyMarkets) some 9 years ago in November 2007, spending 7 years of his tenure as risk manager, thus he is a professional with significant experience in the subject of retail trade execution.
“Here are 7 things I love about B-Book brokers” Mr. Solomou explained.
- They can offer no slippage – reduced trading costs, safer trading
- They can offer Guaranteed stop loss – lower trading costs, safer trader
- They can offer you higher liquidity – lower trading costs as you get filled in 1 click instead of tranches and experiencing slippage
- They can offer higher leverage – they can offer any leverage they want and are not contrained to levarage they get with there trading provider
- They will never chase you for negative balances – Brokers that will chase someone for negatvie balances usually does it because their liquidity provider is chasing them
- They can offer lower spreads – b-book brokers are not forced to markup spreads they get from there own liquidity providers
- They can offer fixed spreads – fixed spreads offer transparent pricing and no supprise spread swideniing resulting in higher trading costs.
Mr. Solomou stated the case for b-book being very suited to the requirements of certain types of trader. “Working with a b-book broker can really mean better trading conditions and effectively lower trading costs than an STP broker due to the above points, the main argument for STP brokers in the retail environment is the transparency based on the ‘’we don’t trade against you’’ ethos, and therefore there is no incentive for the broker to want the client to lose.”
“If this is something you are concerned about then choosing a longstanding broker who has been around for over a decade years, who is regulated in multiple duristictions is of importance” he said.
“By doing that, there would be no need to consider that the broker is manipulating the system to make traders lose, because in circumstances in which the broker is established and has multiple offices in prominent regions, the broker has a lot more to lose reputation wise, as well as in terms of the potential regulatory censuring that would ensue if said broker does try to want to make traders lose” – Markos Solomou, easyMarkets
“Furthermore a B-book broker usually works in the following way” continued Mr. Solomou. “All trades get internalized and offset with opposite client positions, limiting exposures. Should exposure be created after the internalizations then they can offset that risk with their own liquidity provider, thus this is a very efficient model when compared to trying to constantly match thousands and thousands of microdeals” he concluded.
In late 2015, Marc Spaelti, COO at Dukascopy Bank SA discussed this FinanceFeeds at a meeting in Geneva, Switzerland. Mr. Spaelti understands the infrastructural requirements within institutional banking in Switzerland, having spent several years at Swiss Banking Corporation, as well as having led the establishment of retail brokerages and the supply of white label solutions to broker partners.
When asked whether the b-book is here to stay, Mr. Spaelti said “Most certainly it is, for many reasons, one of which is efficiency for traders and brokers, and another is cost. In the infancy of electronic FX trading, many brokers thought about going onto exchanges, but found that they were somewhat expensive, could be inefficient, and did not contribute an OTC market that had huge amounts of liquidity, and this view was held for a long time. The liquidity, if used to execute directly or as a price feed in order to internalize trades is the key point here, not the execution method.”
With the Swiss National Bank event having happened last year, and the ongoing fragmentation of the market which constitutes a proliferation of non-bank liquidity providers, and the idea of a central exchange model perhaps has some merit if it could be made cost-effective.
Mr. Spaelti said “Considering that I have a background in investment banking, having traded spot FX over the counter for years, I quite like the diversification that we currently have with each bank effectively free to quote their prices to their clients, I would envisage a few problems in where to place any exchanges if execution was to go that way, because this is such a global market.”
“Adding another layer to the infrastructure would slow execution down, and potentially cause smaller orders not to be filled as the price moves, thus using a genuine price feed and making a decision to send or internalize is absolutely fine” he concluded.