There are two major ways that your Forex brokerage can manage trades placed by your clients. You pass the trade directly to your liquidity providers, and simply take a small part of the spread in profit, or you take the other side of your clients’ trades, as most traders eventually have more trading losses than gains.
BENEFITS OF STRAIGHT THROUGH (A-BOOK) PROCESSING
Straight Through Processing (STP), also known as the A-Book Forex brokerage model, is the simpler method of the two options. With STP, clients place trades through your Forex platform, and these positions are sent directly to the liquidity providers with whom you have a relationship. Each liquidity provider gives their best avail price available for the desired instrument, and the trader’s order is processed using the liquidity provider who has the lowest spread, which is the difference between the buy price and the sell price. In return for providing the trader with access to the liquidity provider, the broker charges the trader a small portion of the spread, a per transaction commission fee, or a mixture of the two.
BENEFITS OF DEALING DESK (B-BOOK) PROCESSING
Dealing desk, or B-book, brokers take a more active role in the market, by taking the opposite position of their traders. This can result in larger profits than A-Book trading, because you stand to gain nearly the full amount of the trader’s position, instead of only a small fee, and this strategy is popular, as Forex industry leaders report that the percentage of losing traders over a long-term horizon is between 80-95 percent. However, you run the risk of losing money by being caught on the wrong side of a trade. While a B-Book Forex brokerage requires more technical knowledge, as you have to watch out for high-volume traders and scalpers, you are able to attract more traders by offering very low spreads, since your primary source of profit is countertrading.
HYBRID FOREX BROKERAGE MODELS
Many successful brokers capitalize on the advantages inherent in both A-Book and B-Book trading, run their brokerage as a mix between the two. Some traders are wary of working with Dealing Desk brokers, because they are aware of the conflict of interest present if your brokerage only makes a profit when the trader has a losing position. For traders such as these, you can offer STP trading, while traders who are only looking for the lowest possible spreads can be serviced on the B-Book model.