Category: 1. Forex Brokers 101

What is the quality of your broker’s order execution? Order execution is a process of filling the requested buy or sell order of the trader. In the previous lesson, we talked about the prices that forex brokers show you on their trading platforms and whether the prices are fair and accurate. But having fair and accurate pricing… Continue reading What is the Forex Broker’s Order Execution Quality?

When trading forex, you are speculating on the future direction of currencies, taking either a long (“buy”) or short (“sell”) position depending on whether you think a currency pair’s exchange rate will go up or down. Specifically, you seek to profit from fluctuations in the exchange rates between currencies, betting on whether one currency’s value, like the Japanese yen, will go… Continue reading Where Does the Forex Broker’s Price Come From?

For every forex broker, each and every trade entered into by its customers represents exposure to market risk. Market risk is the risk of a loss in a position caused by adverse price movements. Because the forex broker is always the counterparty to your trades, it may decide to execute your trades internally or hedge your trades externally. The term “hedging”… Continue reading Know Your Forex Broker’s Hedging Policy

Aside from forex brokers who “A-Book” or “B-Book“, you might also come across the term “C-Book”. “C-Book” is a term that’s used to describe “risk management strategies” that forex brokers and CFD providers use that are supposedly different from A-Book or B-Book. In our opinion, “C-Book” is just marketing jargon. It’s not really a different… Continue reading C-Book: How Forex Brokers Manage Their Risk

In the previous lesson, we talked about why forex brokers are attracted to B-Book execution more than A-Book execution, even though it’s riskier because the broker can blow up if it doesn’t know WTH it’s doing has poor risk management. But what if brokers could get the best of both worlds? So far, we’ve learned that when a… Continue reading The “Hybrid Model” Used By Forex Brokers

What is a B-Book broker? When you open a trade with a B-Book forex broker, the broker takes the other side of your trade and does not hedge. The broker keeps the trade “in-house”. Remember, if your broker is taking the other side of your order and not hedging it with a liquidity provider (LP), it… Continue reading Why Do Forex Brokers B-Book?

With A-Book (or STP) execution, the broker manages the risk of each trade individually. But what if one trader opens a long GBP/USD position, and another trader opens a short GBP/USD position at or around the same time? Rather than the A-Book broker having to hedge each trade separately with an LP, why can’t the risk exposure from the… Continue reading Internalization: How Forex Brokers Aggregate Orders and Hedge Residual Risk

A-Book brokers are sometimes also marketed as “STP brokers”. But that’s actually inaccurate. While they’re both similar in the sense that they both transfer market risk, they are actually two different ways to execute an order. In this lesson, we will explain the difference between A-Book and STP execution. “Straight-Through Processing” is a term that is commonly shortened… Continue reading STP Execution: How Forex Brokers Manage Their Risk

The A-Book execution model comes with its own unique challenges. An A-Book forex broker can only earn profits from markups IF the rates at which it trades with the LP are better than the prices at which the broker trades with its customers. If not, the broker transfers the market risk but does NOT make any profit and quite possibly,… Continue reading Challenges of A-Book Execution

Not sure you noticed in the previous two examples in the previous lesson, but the A-Book broker did NOT make any money. The examples were shown this way to keep the focus on how the broker offloaded its market risk. So how do A-Book brokers make money? Unlike a B-Book broker, an A-Book broker does NOT make money when its… Continue reading How A-Book Brokers Make Money