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
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
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 ?
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?
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?
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?
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.
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.