Since the first online brokerage was founded in the mid-1990s, the online brokerage industry has undergone many changes. Amid the industry’s ups and downs, some aspects have remained constant—such as choosing the type of brokerage that’s right for your business. With advances in technology, brokerage firms have had more options in recent years.
Pablo Schvartzman, Head of Client Relations at Leverate, a leading provider of brokerage solutions, said:
“Forex trading, unlike stock trading, is not limited to a specific exchange and can be quite complex from a technical standpoint. To ensure that orders are executed quickly and at favorable prices, forex brokers need access to a variety of liquidity providers.At Leverate, we offer a comprehensive liquidity system, LXCapital, which connects our clients to more than a dozen top-tier liquidity providers.”
However, depending on specific needs, the integration of these services may vary. Typically, there are two types of integration to choose from: ECN Straight-Through Processing (STP) or market makers.
Features and Advantages of the A-book Model
The STP model provides direct order execution, allowing orders placed by traders to pass through and be executed directly. Orders are sent directly to liquidity providers within the A-book brokerage, where they are executed. This model offers brokers greater transparency, as they facilitate trades directly.
This approach offers several benefits to brokers:
- First, a broker’s profits and losses have nothing to do with a trader’s profits and losses. This is because a broker’s profits come from the spreads generated by trading volume. In short, STP brokers profit from trading volume, not from traders’ losses.
- Second, brokers act as facilitators of trades rather than counterparties, thereby minimizing their need for reserve liquidity and market risk, which naturally results in lower risk.
Features and Advantages of the B-book Model
The difference between the market maker model and STP is that market makers act as B-book brokers, which means they serve as liquidity providers or counterparties. They typically use trading platforms to manually screen and place orders, or use software to route orders to an ECN.Since market makers carve out a niche in the market by acting as their own liquidity providers, their revenue is influenced by the profits or losses of their traders.
Under the market maker model, brokers act as counterparties, and traders’ losses become their profits. Since most traders’ positions are losing, this can provide better returns than those derived from trading volume. However, due to the positions and liquidity in the market, this model is susceptible to significant risks that would not arise in an STP scenario; therefore, brokers operating under this model face greater risks.
Traders prefer A-book brokers
From a trader’s perspective, the STP model typically offers more advantages than the market maker model. Trades flow directly to the market rather than within the platform, ensuring that positions are executed as quickly as possible without manipulation. Traders perceive the STP model as reducing the risk of slippage. The STP model relies on international interbank clearing without the intervention of intermediaries, resulting in lower operational costs.In contrast, the market maker model involves complex risk management, liquidity oversight, and portfolio structuring, requiring more manpower—costs that are ultimately passed on to traders. Consequently, STP providers tend to offer lower quotes than market makers, which is a significant benefit for clients.
However, since market makers are able to generate higher profits by acting as B-book liquidity providers, this model often offers better profit margins than a pure STP model; therefore, most brokers offer a variety of different models.In recent years, many traditional market makers have begun offering STP/ECN models as they have been losing market share to lower-cost STP providers.
Hybrid Model
In addition, there is a hybrid market-making model in which some orders are routed to the A-book for execution, while others are processed through B-book positions. Pablo stated, “The hybrid model allows brokers to enjoy the benefits of both approaches: the stability of A-book execution and the higher profit potential of market-making.”“For brokers who choose this hybrid model, our LXCapital solution integrates with the intelligent risk management platform LXRisk, seamlessly combining liquidity and risk management. This enables brokers to manage a large volume of concurrent trades, ensures accuracy, and minimizes risk to the greatest extent possible.”
Benefits of Using LXRISK:
- Reduce Exposure: Use our intuitive dashboard to view your risk level at any time.
- Fully Customizable: Configure different settings for different trading groups or traders.
- Real-Time Information: All data regarding each transaction is sent to your dashboard in real time.
- Embedded LXCAPITAL: LXRisk integrates seamlessly with our liquidity solutions to ensure accuracy.
The STP model offers tremendous benefits, but the model you ultimately choose will depend on your competitive advantages. Fortunately, no matter which of the above models you choose, we can customize a trading system to meet your needs.
Are you looking to build a forex trading platform?
Leverate offers you the most advanced, user-friendly, and comprehensive range of trading platforms. If you’re planning to add more trading software to your platform, you won’t lose a single moment of business—we can get you up and running immediately. We can seamlessly integrate with your existing platform, or you can choose the upgraded, unparalleled SIRIX platform to support your brokerage business. Advantages of the Sirix trading platform:
- Cross-channel – native, fully branded apps, web, and desktop
- Social Commerce
- Crypto trading using crypto payment solutions
- State-of-the-art charts, graphs, and tools
- White-label pricing, flexible KYC, master-label permissions
