Brokers can use different methods for execution of their clients’ orders. These differing methods affect the economic relationship between broker and client.
Unlike in Futures and Equities, some brokers of FX/CFDs have a choice as to whether they pass your trade directly to the market, this is known as A booking, or whether they trade against you, which is known as B booking. To understand what this means to the trader, one needs to look at the advantages and disadvantages of both methods.
What Is A Booking?
This business model of a broker requires that the broker passes orders directly to the market for execution. In this process, the broker earns commission for the volume it passes through to the market. Based on such order execution process, we know that this model doesn’t have a conflict of interests because the broker wants their clients to make money so that clients are able to re-invest the profits and therefore increase the volume. However, traders should be mindful of potential “slippage” that may take place when using this model.
What Is Slippage?
It is the term for when the price at which your order is executed doesn't exactly match the price at which it was requested. It can occur in fast market conditions or when there is a lack of liquidity around a news event. What causes slippage is the time that it takes for the broker to process the order through to the market. It does have to be noted that with modern connection speed, the period of time for this processing is as small as minute.
What Is B Booking?
B booking is when the broker chooses not to pass the trade on to the market but take the risk on their own books. This means that the broker's proprietary books have a position which is the exact opposite of the trade placed by the trader. This means that the broker can only make money if the trader loses. The broker is therefore trading against their client as they wish the trader to lose.
Slippage Avoided? Not Really!
The potential upside to the trader of trading with a B booking broker is that of unlimited liquidity. Because the B broker is making a market using its own capital, it is not restricted by the market's liquidity and can therefore avoid the slippage around a news event. Even so, it is important to point out that B brokers are not required to do this and some will simulate the real market and make prices to reflect the slippage.
There is a further model which is a combination of both A and B booking. This is called the Hybrid model. If a trader were to find the idea of his broker trading against them uncomfortable, then the Hybrid model could well be considered as cynical because this model allows brokers to take advantage of the two above-mentioned models.
Brokers who use this method will aim to identify traders/type of trading that regularly make profits and those that make losses. The loss makers are B booked and the profitable ones are passed directly to the market thus ensuring higher profits. The broker will only take the trades that they think will make a loss on their proprietary book.
In short, on being an A booking broker, hence the motto of “Always trades with you, never against you” adorns their website. They also highlight the advantages of dealing with an FCA Authorised and Regulated A booking broker with ultra-fast execution speeds to avoid potential slippage.