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Month: April 2020

What is A-Book & B-Book in Forex Brokerage

Posted on by James Patrick

A-book or B-book? What is all this fuss about? People are confused whether they are on A-book or in B-book while investing on Forex. Which one is safer? Since there is no mention whether you are in A-book or the B-book, is there a way to know you current status in your Broker’s records? And does it really matter whether you have ended up in the A-book or the B-book? In this article, we will answer all these questions but first let us understand what Forex is and what do these books mean. Let’s get started then.

Forex which is abbreviated for Foreign Exchange or the Foreign Currency Exchange market is one of the most important of all trades happening all around the world. The returns are high and there is a reason for that. The simplest way to understand the importance and frequency of trade in Forex is by taking an example of foreign trade. Suppose you are an Indian and you want to go on a tour to Australia. Once you reach Australia, you need to pay your hotel rent, transportation and food charges in Australian currency. And to do that, you need to get your Indian currency changed to the Australian one. Of course because you can not pay in INR. This is where foreign currency exchange happens. This is the simplest example to understand the implication of it. Now think about the magnitude of international trade and tourism happening in an entire month or just even one day. It is huge and so is the benefits of investing in Forex. One huge thing about Forex is that there is no central market for the transactions. Everything is done electronically and between traders and brokers and the liquidity market and this makes it even more intriguing and rewarding in the same place. Now, when you start investing in Forex, you usually have a broker to take care of all your investments and orders.  Whatever you buy/sell, you end up in the entry book and this entry can be in any of these two books: Book A or Book B. And that is what we will talk about today.

Book-A or The Simple Way

  1. Trades ending up in Book A mean that they go passing through the market and then certainly by a bank. All you transaction first go through the bank which are the “providers of liquidity” in the market. In simple terms, when you trade, your broker places an order on your behalf to the bank. The bank then makes entries and checks with their vault status and then your trade order is filled. This is generally the normal way of trade and almost everyday general business trade is done this way. In a nutshell, when your broker sends your trade order to a bank, it is called a A-Booking. The broker has generally a low profit making capacity through Book-A entries.

Book-B or The Closed Path

  1. Let us come to the much controversial Book-B now. As stated above, book-A entries go through the Bank or the liquidity provider and is generally the way of trading. Book-B however holds a different way of doing things. When you place an order through your Forex broker, your entry is kept in the broker entries and it doesn’t seen the entries of the bank. In simple terms, the trade entries are closed away at the brokerage level only. Wait! What? Is that even legal?

    Well, it certainly is and you will be surprised to know that many brokers transfer the trade to Book-B. Why? More profits for the broker obviously. In this side of the story, your broker is betting against you. If you win the trade, your broker considerably makes a loss. Let us elaborate with the previous example. Suppose you are fascinated with the growth of Australian Currency and you have decided to invest in it. Let’s say you buy 20 units of AUD at 50 USD and your broker puts this transaction in Book-B. This means that your trade is never sent to the market where it gets its liquidity from. In other words, your broker is betting against you. If you lose, he will make a profit and vice versa. So when you buy 20 AUD, he has to sell 20 AUD from his account. This kind of trade can be greatly beneficial to the broker. Studies show that for a profit of 5000 USD  made through trades in Book-A, brokers can easily make up to 20,000 USD or even more if they kept that trade in Book-B.

    But again, is it legal? After all, your order is not going to the market. Well, to be clear, yes, this is entirely legal. All regulated brokers whether under FCA, ASIC or NFA are given a licence called the Market Maker’s License. It means that they are officially entitled to purchase directly from the market on behalf of the traders and also they have the permission to fill the trades internally.

You might now think “When do my trades are moved to A-Book or B-Book ?

  1. The answer to this is pretty simple. The key lies in risk. If the trade involves a huge amount of money or the account holder has a pretty high sum of money invested, it is only wise to move the trade to Book-A. After all it involves huge risk, which is certainly a big no-no. Then comes the small trades involving a small sum of money and this is where to opportunities lies. An opportunity with low risks and promising profits and this is when your trade is moved to Book-B.

But is there a way to find out if your trade is going to Book-A or Book-B?

  1. Yes, there certainly is. It is hard to tell if your broker moved your transaction to Book-A or Book-B but you can estimate the same using a simple method. Generally entries moving to Book-A take a while, then it is safe to say that your trade has been moved to Book-A. However, if the trade entry is fast especially during press releases, you know what it is. At high volatilities, it is more feasible to do an instant order fill and this is possible only in Book-B and that’s where your trade is directed.

Which one of those is preferable?

  1. Generally you don’t have a choice to select where your trade ends up at. It’s all up to your broker if your trade is going to Book-A or Book-B and honestly it doesn’t matter much. The course of action that your broker takes will decide if he is making profits or not and it doesn’t affect your money that you traded. Many people will be upset with the idea that their broker is betting against their investments but this is totally normal. After all, they also need to make major money. That is why they are brokers after all.

How does the option of a hybrid sound?

  1. Yes, you heard it right. Brokers today are following a model which can be said as a hybrid of both these entry methods. Brokers identify the winning and losing trades and then they accordingly split your trade according to any one of the category. The winning trades are moved to the bank or the Book-A and the losing trades are diverted to Book-B. This ensures that the broker makes profit out of most of the trades happening in the forex. This obviously won’t affect your trades and is only for the interest of the brokers.

Conclusion

  1. Both Book-A and Book-B are a matter of question to most of the forex investors. While the Book-A keeps all the trades that end up at the real market, those trades which don’t see the liquidity market or the bank end up in Book-B. Book A is the traditional entry method while Book-B is certainly more profitable for the broker. A broker can earn up to 60 % more by putting entries in Book-B. While the selection doesn’t concern the investors, the Book-B path is a matter of upset for most people. No one is comfortable with the idea that their brokers are betting against the trade and therefore it is a thing of high suspiciousness to most people. Although there is a way to determine whether your trade is ending up in Book-B or not, there are not much of things that you can do to change that. If you are uncomfortable with the idea of your trade ending up in Book-B, then you can try identifying better winning trades. This way your broker will have to put your trade in Book-A. Forex is a place where you can earn lots and even loose a lot. It is all a matter of liquidity and volatility. Every small news matter and you need to be aware of your trades to make sure that you end up earning profits. As of brokers, well, they now how to make the best out of worst moments too. Cheers.

     
     

Advantages of Being An Offshore Forex Broker

Posted on by James Patrick

The recent enormous growth in the Foreign exchange has attracted a lot of people to go with Forex trading. The foreign currency market has become one of the largest markets throughout the world and is currently worth more than 60 trillion USD worth capital. With the recent introduction of cryptocurrency, this number is expected to boom higher and higher as time passes and this is exactly what opens up an opportunity for traders. The growing market and the rising profit-making opportunities are attracting a lot of people to start trading forex, and this is only to get bigger and bigger.

Before you start trading in Forex, you need to make a Forex account and then get yourself a broker who can take care of all your trades. The rules of Forex trading might seem complex to new comers but are actually pretty simple and concise. Now, when you start a Forex trade, you have to make sure that you comply with the rules and regulations set by the Forex Regulation and these rules are different for different countries. Some rules like the Foreign Account Tax Compliance Act of USA puts some of the overly regulated trade rules for the brokers in the USA. In some places, the regulations are simpler to follow and so are the rules laid by the Forex. Normally you can open a Forex trading account from your own country and get a Forex broker from the same. This is how the majority of people trade. But you can always register yourself from a different country to enjoy the benefits that you cannot avail at your country of residence.

In this article, we will talk about the advantages of being an off-shore broker and how you can earn more if you follow the protocol closely. Let’s get started then.

1. Tax Benefits

  1. Some countries have a higher tax rate on Forex trades, and this is a nuisance for most Forex brokers. They have to pay a lot in taxes, and it becomes really hard to keep up with the profit margin in a market that is full of uncertainty. One way to cut down on your tax expenses is by operating a Forex brokerage from another country. Being an offshore Forex broker can help you save thousands if not lakhs of your profits. You need to ensure that you have an offshore bank account and that the requirements for the offshore account are suitably met. It is also advisable to take a look at the pros and cons of opening a Forex brokerage at a country. It is usually seen that a country offering low brokerage tax might have other operating expenses which will eventually reduce your profits even further.

2. Restrictions On Leverage

  1. One tier countries like the USA have certain restriction on the leverage (ratio of a company’s debit to equity). In simple words, there is a restriction on the amount of money that the firm can draw from the market. This type of market is generally closed, and it offers a relatively low number of opportunities to earn profits. Some countries, however, have subsequent lesser restrictions on the amount of leverage. This maximizes the money borrowing capacity and in turns provides the necessary liquidity to the company. In such a case, there are higher chances of making profits. Different countries have different limitations. Therefore it is to be ensured that your interests are met accordingly. It is not wise to select an account based on leverage itself.

3. Exposure & Experience

  1. Earning profits and running a successful brokerage is one thing and getting exposure in a completely different thing. Experience and exposure to market are the two important thing that decides a broker’s impact. While being an offshore broker, you are more likely to get more exposure than your counterparts. Handling clients of different regions will give you the confidence that you need in the Brokerage career. Also, exposure to a whole different market place with varying rules can help you learn more about how the market operates and will definitely make you better with time. These things can not be replaced by a theoretical material, and therefore broking in a foreign place can defiantly aid your career in the long run.

4. Legal Compliances

  1. Generally it is seen that opening a brokerage in a specific country is a tough thing to do. There are just too many rules and processes which makes the whole process very hectic and time-consuming. Not only this, the same nature of these rules make it tough for brokers to take care of their trades in a simple manner. While it is a problem in some countries, in others the law makes it easier to open an offshore brokerage. Apart from an easy and simple approach to opening a brokerage, the broker gets various offers and relaxations which might be tough to get in some countries. Not only that, by becoming an Offshore Forex broker, leverage restrictions are eased and is not limited to just that. Having an offshore forex account can essentially remove any tax restrictions and can make brokerage easier for you.

5. Clients

  1. One thing that is definite after operating an offshore brokerage is the number of clients. While dealing with your own country, your client base might be just limited to few, and it might also be tough for you to increase your client base. However, this seems to change once you become an offshore forex broker. Not only you have your usual clients, but you are also presented with multiple opportunities to increase your client base by adding people from the offshore company. This way you can get a lot of clients and that too with different outlook and approaches which can make the brokerage more interesting and profitable. The one thing that comes with this is the experience you get. With more exposure and reputation, your client base will go on increasing and so will your profit making capacity.

Conclusion

  1. These are some of the advantages of being an offshore Forex broker. The benefits are lots but so are the hindrances. Although becoming an offshore forex broker is easy, there are many aspects to it as well. You need to take care of the rules and make sure that you comply with all of them. Now, these rules will obviously be different from your residing country, and therefore it is critical that you understand each of them and make sure nothing is missed out. There are also challenges with opening and maintaining an offshore bank account, and this too needs care and considerable effort to make sure that everything is alright. The tax benefits might sound attractive in some places. However, there might be few regulations that can lower your net profits, and therefore you should be extremely careful while selecting the country of your choice. It is very important that you research each and everything about the country’s forex rules and understand them clearly. Also, you should keep in hold the relations with the offshore bank and the clients as well.

    Opening an offshore Forex brokerage might be secure, but there are indeed a few things that you should know and take care of. Profits and ease of operation should go hand in hand, and therefore it is advisable to know and understand every aspect of forex before you begin. Cheers.

     
     

Difference B/W Dealing Desk Brokers & Non-Dealing Desk Brokers

Posted on by James Patrick

Brokers are people who buys and sells goods or assets for other people. People who arranges a transaction between a buyer and a seller for a commission when the deals goes through is also called brokers. There are also brokers known as Forex Brokers, these guys are the ones that deal with buy and sell goods, services, and assets or such dealings which make use of foreign currencies. They are basically the ones that deal with Forex trading, which is also more popularly known as foreign exchange. There are mainly two types of Forex Brokers, Dealing Desk Brokers and Non-Dealing Desk Brokers. These are the two types of Forex Brokers and today, we are going to look at Dealing Desk Brokers and Non-Dealing Desk Brokers and What is the difference between the two?

To understand the difference between Dealing Desk Brokers and Non-Dealing Desk Broker we must first understand what a Dealing Desk Brokers is and what a Non-Dealing Desk Broker is. So, first let us first understand the concepts of Dealing Desk Brokers and Non-Dealing Desk Brokers are before we carry on.

Who are Dealing Desk Brokers?

Dealing Desk Brokers are more commonly known as Market Makers or DD for short. These, Market Makers, are forex brokers that make off of clients by the use of spread and by also providing liquidity. They are known as Market Makers because of the fact that they literally create markets for their clients. They handle both the buying and selling aspects of the trade and fulfill both the buying and selling wishes of their clients. This might seem like there might be a conflict of interest but there really isn’t such a thing because these guys are not different to the decisions made of an individual trader and they also control the price of the orders made. They also don’t follow the interbank market rates, but the rates that most Dealing Desk Brokers provide are very close to that of the interbank market rates. 

What basically happens is that your Dealing Desk Broker gets trading order and he or she looks at the Winning Trades and Losing Trades of the client. The winning trades could be his offset by matching with other clients or passed on to liquidity provider. And the losing trades could be the countertrade by a broker and it becomes a profit. So, if you place a trading order to buy $1 then the Dealing Desk Broker will look at all the selling trading orders that are available and try to find one matching to your buying order of $1. Or if he can also pass the trades you possess to a liquidity provider, who will readily buy or sell financial assets. 

But if there are no matching orders then what? Then they will take the opposite side of the trade and this would be a higher risk. All the Forex Brokers and Companies have their own risk management levels and you must talk to your Forex Broker to find out more about this. So, basically a Dealing Desk Brokers is a person that passes his or her client/s orders through the dealing desk.

Who are Non-Dealing Desk Brokers?

Non-Dealing Desk Brokers are of two types and are known as ECN or Electronic Communications Network and STP or Straight through processing as well. These guys are basically the ones that does not pass his or her client/s orders through the dealing desk. Non-Dealing Desk Brokers are the ones that do not take the other side of the client’s trade and they just simply let the two clients meet together. What they basically do is they get the trading order and go straight through the Interbank Market to Banks, Hedge Funds, Mutual Funds, Other Clients, or even other brokers. Non-Dealing Desk Brokers are said to have lower spreads compared to Dealing Desk Brokers. But this cannot be considered as an advantage or even a disadvantage because the spreads are not fix and tend to change. Here, you are the one that has to stay diligent and look up the broker’s record.

As mentioned earlier there are basically two types of Non-Dealing Desk Brokers, that is, ECN or Electronic Communications Network and the STP or Straight through processing. Let us look at what these two types are: –

1. ECN – Electronic Communications Network

  1. ECN Brokers are the ones that take the orders of the client and allow them to look at the orders of the other participants in the ECN and they allow their clients to have a look at the Depths of Market. These participants vary from banks, hedge funds, other brokers, retail traders, etc. It is not easy to get a fixed markup, due to this ECN brokers get paid much lesser compared to STP, that is, their commission is low.

2. STP – Straight Through Processing

  1. STP Brokers are brokers who route the order of the clients they have to their liquidity provider who have access to the interbank market. These guys will have a lot of liquidity providers who quote their own bid and ask price. In the quote you see, the brokers markup will be added which is quite small. Because of this small change in the bidding or asking quote, the STP brokers maintain spreads that are a variable. This is because if a liquidity provider widens his or her spreads then the STP brokers will have to widen them too. Well, there are some who give you fixed spreads, but the majority lies in the Variable Spreads.

What are the differences between Dealing Desk Brokers and Non-Dealing Desk Brokers?

  1. Now, let us get to the main question of this article, what are the differences between Dealing Desk Brokers and Non-Dealing Desk Brokers? Well, before we get to the answer to that question, we must look at one more thing.

    That is, you must understand and realize that whichever type of broker you pick in the end of the day, depends completely on you. You could pick a Dealing Desk Brokers or Non-Dealing Desk Brokers, it doesn’t matter a lot because in the end of the day, everything depends on your capabilities and depends on what type of trader you are. Know this that we can’t say which broker is better, that is, whether the Dealing Desk Brokers or the Non-Dealing Desk Brokers is better.

    Now, keeping that aside let us look at the major differences between Dealing Desk Brokers and a Non-Dealing Desk Brokers. Here, we are going to take Non-Dealing Desk Brokers apart and see the differences between Dealing Desk Brokers and STP Non-Dealing Desk Brokers and ECN Non-Dealing Desk Brokers. This will allow you to understand the concept more clearly.

Differences Between Dealing Desk Brokers and STP Non-Dealing Desk Brokers and ECN Non-Dealing Desk Brokers

1. Spreads

  1. When we look at the differences in spreads among the three we will notice that Dealing Desk Brokers or Market Makers have fixed Spreads and not variable spreads. But most STP Non-Dealing Desk Brokers have variable spreads, while a small margin doesn’t have variable spreads but have fixed spreads. And the ECN Non-Dealing Desk Brokers have an option of either variable spreads for the clients or different commission fees.

2. Opposite Side of the Trade or Liquidity Providers

  1. When we see the differences in whether they take the opposite side of the trade or if they link up the liquidity provider, we can clearly see the difference that Dealing Desk Brokers do not link the client up with the liquidity provider, but they instead take the opposite side of the trade. And STP Non-Dealing Desk Brokers, they act as a bridge between the client/s and the liquidity provider while ECN Non-Dealing Desk Brokers act as a bridge between the client/s and liquidity provider and also to the other participants.

3. Pricing

  1. The pricing is a clear difference when we look at Dealing Desk Brokers and Non-Dealing Desk Brokers. Dealing Desk Brokers give you an artificial quote and on the other hand Non-Dealing Desk Brokers don’t, that is STP give you the price from the liquidity providers in which they add a really small amount for themselves, and ECN give you the price from the client and liquidity provider and other ECN participants.

4. Order Execution

  1. In this we can see the difference in the execution of the orders and you will notice that the orders are filled on a discretionary basis by Dealing Desk Brokers. But on the other hand, STP Non-Dealing Desk Brokers have an automatic execution and don’t allow re-quoting. And ECN Non-Dealing Desk Brokers don’t allow re-quoting either and also have automatic execution, but they also display the Depths of Market to the client, which basically is liquidity information.

    And here are all the differences between Dealing Desk Brokers and Non-Dealing Desk Brokers. This shows you the simple differences between them and as mentioned earlier the choice to go with either one is up to you and in the end and your decision should be based on the fact of which type of trader you are!

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