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The A Book - used by ECN / STP forex brokers

ECN/STP brokers all use an A Book, they are intermediaries that send their clients' trading orders directly to liquidity providers or multilateral trading facilities (MTFs). These forex brokers make money by increasing the spread or by charging commissions on the volume of orders. Therefore, there are no conflicts of interest, these brokers earn the same amount of money with both winning and losing traders.

The B Book - used by Market Maker brokers

Forex brokers that use a B Book keep their clients' orders internally. They take the other side of their clients' trades, which means that the brokers' profits are often equal to their clients' losses. Brokerage firms are able to manage the risks associated with the holding of a B Book by using certain risk management strategies: internal hedging through the matching of opposite orders submitted by other clients, spread variations, etc. As the majority of retail traders lose money, the use of a B Book is very profitable for brokers.

The hybrid model - A Book + B Book

The popularity of the hybrid model is understandable, as it allows forex brokers to increase their profitability as well as their credibility. It also enables brokers to earn money off of profitable traders by dispatching their trading orders to liquidity providers.

To efficiently identify profitable traders, as well as unprofitable ones, forex brokers have software that analyses their clients' orders. They can filter traders according to the size of their deposit (the percentage of winning traders increases significantly for deposits over $10,000), the leverage used, the risk taken on each trade, the use or non-use of protective stops, etc.

The hybrid model is not necessarily a bad thing for traders because the profits made off of traders that are placed in the B Book enable hybrid brokers to provide all of their clients with very competitive spreads, whether they are profitable or not. The main disadvantage of this system is that if a hybrid broker mismanages the risk of the B Book, he can lose money and therefore endanger the company.

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