An effective broker is a company that can find a buyer for every seller and vice versa. High liquidity is indicative of the reliability of a financial institution. It can be achieved in two ways:
- Cooperation with liquidity providers.
- Independent transaction processing without involving third parties.
This is the main difference between the A/B-Book models.
A-Book
This model is also known as a “through” model, where transactions are concluded without a broker’s participation. That is, they are withdrawn to the “interbank”, where they are closed out by liquidity providers. An advantage for investors is the fast order execution speed, regardless of the volume. A-Book allows quickly responding to market changes and is suitable for professional traders.
From a trader’s point of view, the collective image of a broker working according to the A-Book model has several special features:
- Increased minimum deposit requirements. A few hundred dollars is not enough to work in the interbank environment. A link to a liquidity provider is provided to large investors and experienced traders.
- High system commissions. Quick and direct access to the “interbank” requires certain investments.
- Low leverage. Allows you to weed out traders with an aggressive strategy and insufficient experience.
There are not too many brokers working exclusively by the A-Book model. And it’s definitely not suitable for beginners or investors with little capital.
B-Book
The second model involves independent order processing. The search for buyers and sellers is carried out using internal reserves and the audience that we managed to attract. This workflow organization method leads to problems and risks.
Under the B-book model, situations, when demand does not match supply or vice versa, will arise on a regular basis. In that case, the broker has to either send the transactions to the exchange (users look through the listed offers and choose only from those available) or compensate for the orders at their own expense. B-book generates a conflict of interest when traders’ successful trades turn into brokers’ losses.
Hybrid model
Seamless use of the hybrid scheme requires the integration of the Liquidity bridge into the broker platform. The software allows users to automate the process of switching between A-Book and B-book models for different user categories (depending on the settings). The plugin is a risk management tool since it does not allow traders with a strategy that a broker considers questionable to be connected directly with liquidity providers.
A hybrid scheme that helps to divide the audience into groups and assign the right model to each is used by most brokers today. All transactions conducted by inexperienced beginners and traders with an aggressive strategy are processed by the company independently. It is both easier and more profitable. If the client has sufficient capital to enter the interbank or a profitable strategy, he can be linked directly to liquidity providers, most likely bringing in profits for the broker. It’s a win-win setup. You can learn more about the Liquidity Bridge functionality at https://takeprofittech.com.