This weekend was a busy one at XBTFX. We have been making some much needed changes to the website interface, beefing up our internal roadmap of new products, and preparing for the deployment ofSumSub&Bitfury Crystal. We have made some improvements to the navigational menu and added dashboard widgets in response to feedback from our users . As always, we will continue to add improvements and products derived by the feedback and requests from our users.
All broker tasks aside, the real motivation behind this post, is our staff observation of the amount of support tickets and general inquiries from new and potential new users asking us about execution and if profitable trading is granted in all cases at XBTFX. A majority of these tickets include a story of a negative incident experienced trading at other competitive brokers surrounding execution changes or profits removal etc. Given this observation over the last several months, we have been wondering that perhaps it might be a good idea to write a little set of articles explaining the workings of a Forex/CFD broker. Expect to read some interesting stuff from us about some of the inner workings of a Forex broker. However, we digress. Let’s get back on point.
First, let us tell you that if your spreads increase as your account gets close to its stopout level or your broker frequently emails you that your profitable trades are under investigation for broker terms violations, you probably should run away from the broker you are using. This means there is a high likelihood the broker you are using is running a B-Book( aka the notorious FX broker 'Dealing Desk'), and your profits are causing losses to the broker. This is a very common solo model for unregulated fx/cfd brokers. To make this really simple there are basically three types of FX broker models - A-Book brokers, B-Book Brokers and C-book Hybrid brokers. Realistically, almost all regulated brokers are either A-Book or Hybrid brokers. However, when it comes to unregulated brokers a lot of brokers tend to be B-Book only with most having access to some liquidity that is rarely used or is the minimum required to get a proper quote feed. This is not necessarily an indication of any bad intent, it is often a result of desires to cut cost down, but that can cause problems in itself.
Now let’s touch base on what these models are. A-Book( aka STP, ECN ) means, basically, that your trades are passed to a liquidity provider removing the risk of the trade from the broker. Basically, the broker has no interest in how your position does, it makes money purely on the commission generated from the spread or fee. B-Book( Dealing desk, DD ) means that the broker doesn’t pass your trades to liquidity providers and is the counter-party of your trades. In other words, when you win the broker losses and vice versa. Lastly, the Hybrid model is really what is the most common model even among regulated brokers. In the Hybrid model, the broker will put winning accounts on A-Book and losing accounts on B-Book via an algorithmic or manual statistical selection model.
All of the above being said, its fairly common sense to see how a B-Book only model can create a conflict of interest.
Now, let us stress that a B-Book model is not illegal if the broker has A-book ability on the side. In fact, it usually costs a little bit more to be regulated with a B-Book option. By general EU area license standards it's usually a 750k to 2 mln regulatory deposit as a guarantee you have the ability to run a dealing desk and it must be run fairly with no changes to spreads , asymmetric slippage and without broker plugins that add artificial difficulty. Furthermore, one of the biggest brokers in the world, that operates in the US is exclusively Dealing Desk only, however, of course they have many liquidity providers and access to liquidity with which they hedge client exposure in large chunks.
Truth be told the concept of B-Book is the foundation on which every casino is open and that is exactly why you will see competitive broker offers with high leverage propositions in FX & Crypto up to 2000x along with extremely low spreads, fees and stop out levels. These brokers likely don’t have any liquidity and as such want to offer exceptional conditions that will promote more frequent, large volume trades and the means to liquidate as soon as possible. There are absolutely traders who hit home runs but as they get accustomed to the high leverage, it's a matter of time before they loose their deposit. Even under such circ*mstances, the odds are in the brokers favor which is the statistical advantage to justify a B-Book Only model with amazing leverage and spreads. In this regard, this is exactly why it is very important to keep your leverage tight as we have advised over and over again. It is also very important to understand that offers of extremely low spreads & trading costs are usually a tell sign of "Dealing Desk" brokers. Liquidity costs money and no liquidity provider will offer liquidity for free to brokers.
Because people don’t really understand much about brokers even if they are a trader themselves, most can’t recognize what we at XBTFX bring to the table, but the truth of the matter is we have real liquidity and all the good, bad and ugly that comes with it. We make money, when our clients continuously trade .
While this post is hardly altruistic and by itself contains a shameless plug of our own liquidity here are some tips on how to spot a B-Book broker:
- There is near zero delay from when you press a buy/sell market order and it’s actually execution. STP/ECN brokers will usually have a small delay as the trade needs to be filled with the liquidity provider and sent back to Metatrader. Please note, this is especially evident if you are trading larger positions over 10 lots and the order requires volume filled via market depth. ( XBTFX top of the book for FX is 6 lots ).
- There is zero change in price when you press a buy/sell market order and the actual price of the order. While this can happen with STP during slower hours, if this happens every time its a good tell sign.
- There is no slippage on your stops/limit orders. STP usually has some small slippage.
- You see a spread increase as your account gets close to its stop out level. If you have a large balance and have averted liquidation frequently, B-Book brokers may get aggressive if you account gets close to its stopout to ensure your losing trades get booked.
- The spreads are near 0. This is usually a good tell sign especially for unregulated entities. Some regulated entities offer very low spreads or fees in the hopes to make money via additional products they offer and their internal risk management system, so it is not a 100% guarantee. However, unregulated brokers with extremely low spreads usually don't pass trades to liquidity providers and thus don't have that cost. Access to real liquidity doesn't come cheap even if you are a big broker. For example, if you look at XBTFX's spreads you will see that they are very competitive when compared to regulated big entities such as FXCM, however, they don't get as close to zero compared to some other offshore brokers. Over 30% of what we charge our clients for our spreads goes to our liquidity providers as a cost billed to us for passing the trades to the real market, thus it's obvious how we are fairly limited in our ability to further lower spreads or give aggressive rebates to partners while maintaining STP integrity.
- Affiliate rebate fees are in excess or close to equal to the commission or spread amount. This is a sure tell sign - if the broker is willing to give away its commission close to 100% in aggressive affiliate rebates, then its clear the broker is not profiting from its fees and is relying on other means via client performance.
If you are concerned that your broker has you on its dealing desk it never hurts to simply ask your broker and put them in a position to put in writing what model your account is on.
Want to know more? Feel free toreach out to us! We look forward to following up with our next article taking into account any questions comments and feed back.
Look forward to our next article when we will explore liquidity providers, the concept of toxic flows and other interesting things from the inner workings of a broker.
Thisinsighthas been published byXBTFX.
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