You are carefully planning your business. A great sign since success starts with preparation. In your case, this is a business plan for a brokerage. It is interesting how the forex industry has a placeholder for running a brokerage business. That is how the definition of A Book or B Book broker types emerged, even though there are blends, in-between types, that can truly fit the success of your brokerage. These two models explain the general outline of how brokerages deal with the trades, how they are executed, and what it all means for your business. Your ideas to bring value to your clients and compete with other brokerages makes all the definitions irrelevant. At the end of the day, you will probably forget which business models stand for A Book or B Book and you will come back to this article. However, understanding how brokerages run nowadays is of paramount importance. Later on, your brand will evolve, sustain its advantage and cope with challenges. But in the beginning, setting the business model according to the marketing mix will considerably reduce your risk. If you are just here for the definition, the next two paragraphs explain the inner workings of each model. Later on, we summarize the risks inherent to every business and the differences.

Specific to the latest stages of the forex industry, technology is the backbone of trading today. Brokerages have evolved and the market has become exceptionally competitive, forcing lower trading costs and faster trade execution times. We now have so many automated trading solutions that rely on this tech, that many strategies cannot work without fast execution and low spreads. As you are reading this, you are probably wondering if you are ready to have competitive spreads and have fast servers. This is a must-have for the A Book brokerage model. With A Book, there are no dealing desks, no human interference (ECN), and a trade placed is directly forwarded to the liquidity provider (Straight Through Processing). So, your brokerage is acting as a bridge, connecting traders to the market. When your client/trader places a Buy order, for example, your brokerage forwards that order to your liquidity provider that matches it with a party willing to sell. If your brand is capable of having multiple liquidity providers with modern connectivity technology, you will attract a growing community of scalper and robot traders. Of course, this benefit is universal, all traders like fast execution, low spreads, no slippage, and deep liquidity. There are several ways of obtaining this advantage. Most are based on aggregation technology, mixing several liquidity providers and the Intermarket to bring the best matching offer to the trader. STP brokers, therefore, do not have any conflict of interest with the trader as their trades are merely forwarded. Now, this means your business’s main source of income would be the markup spreads and/or commissions. Adding up other complementary services such as VPS, API, or different platforms is something to consider if you plan on keeping the core advantage (low trading costs) sustainable.

Market Maker brokers tend to have a negative bias nowadays, mostly stemming from the conflict of interest issue. This model has numerous advantages as a business though. And it does not have to exploit the trader’s activity (trade against them), but more on this later.Market makers create their liquidity pools without the need for external providers. Contrary to the A Book model, trades are settled internally, through the Dealing Desk. Now, the prices do not have to follow the market quotes. This method can create liquidity even though it is artificial. Additionally, the market maker has more options for how the spreads are applied, i.e., they can be fixed. Fixed spreads are usually wider than variable spreads offered by STP models under normal conditions, however, they have the advantage of being fixed even in times of high volatility. Traders that like news trading or picking exotic assets will certainly appreciate predictable trading costs. Market makers use the fact that most traders lose their deposits, mostly because of reckless trading. By trading in opposite directions, market makers make money as traders lose. While this is considered unethical in the trader community, traders with consistently profitable strategies enjoy advantages they cannot have with STP broker models. Aside from fixed spreads, market makers are able to provide a wider asset range, guaranteed stop loss, and even proprietary trading features. The market maker model requires investment in the dealing desk department as monitoring and risk management require staff. Also, risk comes not only from traders that are making money but from the markets themselves. More complexities arise, such as the staff skill, software, licenses, marketing, etc. Because of this, market makers carry substantial fixed costs that STP models do not have. When looking at the structure of the forex industry, market makers are fewer but are large, cover wider markets, and have layered marketing. Needless to say, market makers’ profits dwarf those of STP-type brokers. However, STP brokers are very competitive because of lower barriers to entry and flexibility.

In the pursuit to get ahead, it was expected for brokerages to try to get the best from both worlds, A and B Book models. When we understand both types, it is obvious that established market maker brokers have the luxury of trying out different products and accounts. It is very popular to see several account types that include fixed or variable spreads, no commissions, no swaps, zero spread, and various other features only established brokers can offer. Using the STP model, they also offset the risk of profitable traders and attract traders seeking STP conditions. Mixed models manage which traders are the best to just forward to the market and which to trade against. In the case of black swan events, such as the 2015 SNB Swiss Franc rug pull, mixed market makers were exposed to extreme losses. Alpari UK, for example, had to announce insolvency soon after.While automated and fast-paced trading is getting ever popular; copy trading, trader funding, and other services join the mix that your brokerage can also offer. A good share of traders do not care about anything except fast executions and low trading costs. Analyzing the market should answer the question of which broker model to use, or better, what deliveries are giving you the advantage.

A starting brokerage business type is likely to be an STP model for most investors. This is a very competitive market yet every broker can provide added value in its way. Let’s summarize what the most important takeaways are:

• STP or A Book brokerages lean on technology that connects traders with markets. Market makers on the other hand focus on the dealing desk management technology and staff.
• STP brokers need to have connections to liquidity pools and asset exchanges to provide quality STP trading conditions. Market Makers can utilize their internal liquidity pool.
• STP model income depends on commissions and mark-up spreads which can be competitive. Market makers enjoy higher profits but are exposed to market risks and costs.
• STP brokers can connect to other market maker brokers, however, their trading conditions are typically not attractive.
• Market makers are less flexible and are under strict regulations while STP brokers can be small offshore companies with greater freedom.
• The latest trends favour copy trading, robots, and crypto trading, which may be more suitable for flexible STP brokers.