How Brokers Make Money: A-Book and B-Book

When you buy one lot of EUR/USD, somebody is short one lot of EUR/USD. Two arrangements are possible: your broker found that somebody, or your broker is that somebody. Which one it is changes the incentives in the relationship, and every retail broker does some of both.

Passing the risk on: A-book

In the A-book model the broker does not hold your position. It opens an offsetting trade with a liquidity provider — a bank or a non-bank market maker — so that its own exposure nets to zero.

Follow the money and the incentive is clean:

• The broker earns a markup on the spread, a commission, or both.
• It is flat either way, so your profit or loss does not touch its balance sheet.
• It wants you to trade more, and to survive long enough to keep trading — volume is the revenue.

That alignment is the model's selling point, and it is real. It is also the reason A-book accounts usually charge a visible commission: there is no other place for the revenue to come from.

Taking the other side: B-book

In the B-book model the broker keeps your trade internally. It is now short what you are long. If you lose, it keeps your loss; if you win, it pays you out of its own funds.

Stated that starkly it sounds indefensible, and the reflex is to assume any broker doing it is working against you. Two facts complicate that.

• Client flow nets off. At any moment a large chunk of clients are long and a large chunk are short. The broker only carries the difference, which is far smaller than the total.
• Internalising is genuinely cheaper. Not paying to route every order out is why a B-book account can offer tight spreads, no commission, and one-cent minimum sizes on a $50 deposit — which no bank would ever quote directly.

The honest version of this model is a market maker managing a book: it hedges the residual exposure it does not want and keeps the spread on the rest. The dishonest version has tools the A-book does not — asymmetric slippage, selective requotes, a delay applied only to profitable clients — and the conflict of interest is what makes those tools tempting.

Hybrid models

In practice essentially every retail broker runs both, and sorts clients between them. This is normal, disclosed in general terms, and rarely explained specifically.

The counter-intuitive consequence is that becoming profitable often improves your execution. A client the broker no longer wants to hold gets routed out, and routed-out orders behave the way the A-book description says.

What this does and does not mean for you

• It does not mean your stop is being hunted. Your broker does not need to move the market to profit from a B-booked loser; it only needs to wait.
• It does mean execution statistics are worth keeping. The asymmetries that matter show up as patterns across dozens of trades, never in one.
• It does mean size and pattern change your treatment, which is worth knowing before you conclude a broker "got worse" after you scaled up.

Reading an execution policy

Every regulated broker publishes an order execution policy. Almost nobody reads it, and it answers this lesson's question directly. Look for four things.

Then check the entity, not the brand. A single brand often operates several licensed companies, and the same account name can be agent-executed under one regulator and principal-executed under another. The entity your contract names is the one whose policy applies to you — the subject of the next lesson.