What are A-Book and B-Book, and how do they differ from ECN, STP, and Market Maker?

When a trader presses the Buy button, where does that order go? There are two main answers. First, the broker passes the risk on to a bank or a large liquidity provider. Second, the broker takes the order themselves and stands on the opposite side of the trade from the trader. These two approaches are what the industry calls A-Book and B-Book, and they determine how a broker makes money.

The problem is that the terms A-Book and B-Book are often conflated with ECN, STP, and Market Maker, making them seem like the same category. However, these two sets of terms answer different questions. This article will break them down layer by layer, explaining the mechanisms of each model without naming specific brokers, and summarize how regulatory bodies like ESMA, FCA, and ASIC address conflicts of interest in these models. If you're not yet familiar with basic costs like spreads and commissions, you can read What is Spread and How Does it Differ from Commission? for more context.

Quick Summary: What's the Difference Between A-Book and B-Book?

A-Book refers to a broker passing on client orders or risks to a Liquidity Provider. The broker primarily earns revenue from spreads or commissions. B-Book, on the other hand, means the broker acts as the counterparty to the client and holds the risk themselves. When a client incurs a loss, that amount becomes the broker's revenue.

• A-Book: Market risk is passed on. Revenue comes from service fees per trade.
• B-Book: Market risk remains with the broker. Revenue is tied to clients' net losses.
• Hybrid: Uses both models, choosing to pass on some orders and keep others.

In practice, many brokers do not exclusively operate on one extreme or the other. ESMA's Q&A document itself states that the same firm may use a single hedging model or a combination of several (ESMA35-36-794).

How Do Forex Brokers Make Money?

Every broker has operating costs: trading systems, staff, licensing fees. The more important question than "Can they make money?" is "Where does the money come from?" because the revenue stream indicates whether the broker's interests align with or conflict with those of the traders.

Common primary revenue streams include:

1. Spread markup Brokers receive prices from liquidity providers and add a markup before displaying them to clients. Every time an order is opened, this markup is revenue, regardless of whether the client profits or loses.
2. Commission per lot Commonly found in accounts advertised with narrow spreads. Revenue is tied to trading volume, not to the outcome of the trades.
3. Swap differential The overnight interest rate charged by the broker may be higher than the actual cost paid by the broker. Details can be found in What is Swap Fee? How to Calculate Overnight Forex Swap Fees.
4. Clients' net losses (B-Book portion only) When a broker acts as the counterparty and does not hedge that order, the money lost by the client becomes the broker's profit, and the money gained by the client becomes the broker's loss.

The first three channels are "toll-based" revenue; the broker earns money when clients trade. The fourth channel is structurally different. ESMA explicitly explains this point: firms that hedge all client orders can profit regardless of whether the products bought by clients are profitable, because market risk has been passed on to liquidity providers. Therefore, the incentive to disadvantage clients is lower (ESMA35-36-794).

The figures that give weight to the fourth channel: In its 2018 measures to regulate CFD products, ESMA cited analysis by national regulators in Europe showing that approximately 74% to 89% of retail CFD accounts incur losses (ESMA, 2018). When most traders incur net losses, holding the opposite side of the risk becomes a rational business choice, and it is the sole reason why regulators pay special attention to this model.

Two Sets of Terms Often Conflated: Order Execution Method vs. Who Holds the Risk

The most confusing point is that Market Maker, STP, ECN, A-Book, and B-Book are often listed together as if they were five options in a single menu. In reality, these terms can be divided into two axes.

Consider an account named "STP Account." This name indicates that orders flow through an automated system directly to liquidity providers without human intervention. However, it doesn't guarantee that the risk of every order is always passed on. The decision of which orders to hedge and which to keep lies within the broker's risk management policy, which is the second axis.

ESMA also adopts this perspective. In its Q&A document on CFDs, the authority does not categorize brokers by account name but rather by whether the firm hedges client orders and to what extent (ESMA35-36-794).

What is a Market Maker (Dealing Desk)?

A Market Maker is a broker that quotes its own bid and ask prices to clients and acts as the counterparty for every order opened by a client. If a client buys one lot of EUR/USD, the broker is the seller of that lot; they do not seek a seller in the external market. Hence, they are also known as a Dealing Desk (DD).

A mechanical advantage is that the broker can control the displayed prices, which is why some offer fixed spreads and can accept very small order sizes. The limitation is that when market prices move rapidly, a broker setting its own prices might reject the original price and offer a new price (Requote) instead of filling the order immediately.

The term Market Maker itself does not imply a 100% B-Book model. A Market Maker that acts as a counterparty for orders may choose to hedge the net sum of all orders with a liquidity provider. This is the first model in ESMA's classification: the firm acts as a counterparty to clients but manages risk by hedging all orders on an individual or aggregated basis (ESMA35-36-794).

What is STP?

STP (Straight Through Processing) is the automated routing of client orders directly to one or more liquidity providers, without a broker's dealing desk in between. Liquidity providers are typically banks or institutions that quote prices in the interbank market.

STP brokers typically earn revenue by adding a markup to the prices they receive. Spreads are therefore variable and can widen during significant news events. Orders may also be filled at a different price than requested (Slippage) instead of being requoted. The mechanism of slippage is explained in detail in What is Slippage? Why the Price You Get Isn't What You Ordered.

Important point: ESMA states that if a firm routes orders through an STP platform that connects liquidity providers with clients, but the firm receives remuneration based on the platform's profits or losses, conflicts of interest still exist (ESMA35-36-794). Therefore, the name STP does not automatically resolve questions about conflicts of interest.

What is ECN?

ECN (Electronic Communication Network) is an electronic network that aggregates bid and ask prices from multiple participants, such as banks, financial institutions, and other traders, and then matches orders within the network. Brokers offering services via ECN connect traders to this network; they do not set their own prices.

The result traders see is very tight raw spreads during active market periods, plus a separate commission per lot. Many platforms also allow viewing the Depth of Market. The correct way to compare costs is to combine the spread and commission into a total cost per trade, which the article on spreads has already explained how to calculate.

The bigger picture helps to understand what the "real market" that ECN and A-Book connect to is. The BIS Triennial Survey 2025 found that the average daily turnover in over-the-counter (OTC) foreign exchange markets was $9.6 trillion in April 2025, with inter-dealer trading accounting for 46% and trading between dealers and other financial institutions accounting for 50% (BIS Triennial Survey 2025). Therefore, the Forex market does not have a single central exchange like stock markets. Prices are generated by a vast network of dealers and platforms, and the liquidity providers that retail brokers connect with are part of this network.

How A-Book, B-Book, and Hybrid Models Work

This section covers the second axis: once a broker receives an order, regardless of the system used, who bears the risk of that order?

A-Book: Passing Risk to Liquidity Providers

When a client opens a Buy EUR/USD order, the broker opens an equivalent Buy order (or aggregates it with other orders and opens a net position) with a liquidity provider. If the price rises, the client profits, and the broker pays that profit to the client while receiving an equal profit from the liquidity provider. The broker itself does not profit or lose from price movements; its revenue comes from the added spread or commission.

However, A-Book is not without issues. ESMA provides two examples where conflicts of interest can still exist even if the firm hedges. First, if hedging is done with an affiliated company, the group's interests remain intertwined. Second, if the firm designs its hedging to benefit itself when prices move favorably between the client's order and the hedge execution, but passes on unfavorable price movements to the client. ESMA refers to this behavior as "asymmetric price slippage" (ESMA35-36-794).

B-Book: Broker Acts as Counterparty and Holds Risk Itself

When a client opens a Buy EUR/USD order, the broker takes the order into its own book and does not pass it on. If the price falls, the client loses money, and that amount becomes the broker's profit. If the price rises, the broker must pay the client's profit from its own funds.

From a business perspective, B-Book works because a large number of client orders offset each other (one client buys, another sells), so the broker only holds the net position. It also works because statistics released by regulators indicate that most retail traders incur losses.

Acting as a counterparty itself is not inherently illegal. ESMA classifies this model as one of three commonly found. However, in cases where a firm acts as a counterparty without any hedging, ESMA clearly states that the firm has no incentive to execute orders in the best interest of the client, because "if the client wins, the firm loses." It views such conflicts of interest as highly likely to "cannot be managed" and therefore advises against using such models (ESMA35-36-794). This is ESMA's guideline for firms under MiFID in Europe, not a universally applicable rule.

Hybrid: Partial Hedging

Hybrid is a commonly observed model in practice, where brokers keep some orders themselves and pass others on. ESMA provides examples of criteria used for this division, such as hedging when the risk exposure exceeds a defined threshold, or hedging only for specific client groups (ESMA35-36-794).

ESMA further explains that both the non-hedging and hybrid models have a relationship between client profits/losses and the firm's profits/losses. For hybrid models, this relationship varies in degree depending on the scope and nature of the actual hedging performed.

ASIC in Australia views the same issue from another angle. In its REP 579 report, which reviewed 57 retail derivative issuers, ASIC categorized risk management strategies into three types: hedging all market risk with third parties, partially hedging and keeping the remainder in their own books, and keeping all market risk themselves. It noted that transferring market risk to third parties reduces market risk but increases counterparty risk, while keeping the risk oneself increases market risk (ASIC REP 579). The same report found that approximately one-third of product issuers relied on related parties for pricing and hedging, which concentrated market risk with a single counterparty (ASIC REP 579, PDF).

Comparison Table of Each Model

This table compares models based on their mechanisms. No column is a "winner" because each model has different trade-offs, and real brokers often combine multiple approaches.

How Regulators View Conflicts of Interest

This topic is often discussed with heightened emotion. The facts from regulatory documents are much more straightforward. The essence is that regulators acknowledge that models where firms act as counterparties to clients exist and are commonly used. Therefore, they impose duties on firms to identify, manage, and disclose conflicts of interest, rather than issuing blanket prohibitions.

ESMA (European Union) In addition to the three models categorized above, the Q&A document also stipulates that regardless of the model used, firms must always inform clients that they are the client's counterparty and must disclose conflicts of interest before executing transactions on behalf of clients where relevant. ESMA also requires national authorities to consider how much a firm relies on CFD revenue, as firms relying on a single revenue stream may have greater conflicts between business pressures and client interests (ESMA35-36-794). ESMA has updated this Q&A document since 2016, including adding issues of conflicts of interest arising from remuneration between firms and persons performing activities on their behalf, which may incentivize behavior not beneficial to retail clients (ESMA, 2016).

FCA (United Kingdom) The Best Execution rule in COBS 11.2A requires firms to take all sufficient steps to obtain the best possible result for their clients, considering factors such as price, cost, speed, and likelihood of execution and settlement. Crucially for this topic, COBS 11.2A.4G states that a firm dealing on its own account with a client is considered to be executing a client order and must also comply with the Best Execution rule (FCA Handbook, COBS 11.2A). Furthermore, SYSC 10.1 requires firms to identify and prevent or manage conflicts of interest, and one of the situations to consider is where the firm is likely to make a financial gain or avoid a financial loss at the expense of the client (FCA Handbook, SYSC 10.1).

ASIC (Australia) In addition to REP 579, ASIC has Regulatory Guide 227 (RG 227), which sets out 7 disclosure requirements for CFD issuers (ASIC RG 227). Requirement number 3, titled "Counterparty risk, Hedging," directly aligns with the topic of this article. RG 227 states that product issuers should have a written policy for managing market risk from client positions, identify factors used to assess the financial standing of hedging counterparties along with a list of those counterparties, and should publish the latest version of this policy on their website (ASIC RG 227, PDF).

A caution when reading this section: these rules apply only to firms genuinely regulated by those specific authorities. The level of protection offered by each authority differs. A detailed comparison can be found in How Do FCA, ASIC, CySEC, FSCA Differ? Which Offers Real Protection?

How Dealing Models Affect Traders in Practice

Most traders do not see whether their orders are A-Booked or B-Booked, but the effects of the model manifest in three observable points.

Symmetry of received prices In a normal market, slippage should occur in both directions: sometimes a worse price than ordered, sometimes a better price. If many orders only experience negative slippage but never positive slippage, that aligns with what ESMA calls asymmetric price slippage. This observation can be used to question a broker, but data from a few orders alone cannot draw definitive conclusions.

Counterparty risk In models where the broker is the client's counterparty, the ability to pay profits to clients depends on the broker's financial standing. In models where hedging is used, the risk shifts to the stability of the liquidity provider. As ASIC points out, segregating client funds from company funds provides another layer of protection. Read more at What is a Segregated Account? Does it Really Make Client Funds Safer?

Cost characteristics Fixed-spread, no-commission accounts are often associated with brokers who set their own prices. Raw-spread-plus-commission accounts are typically associated with order routing. However, this relationship is a tendency, not a rigid rule. Lower costs on paper do not necessarily reveal the underlying risk model.

What Documents Can Be Used to Check a Broker's Model?

Brokers are not required to announce on their homepage that they use a B-Book model, but brokers regulated by major authorities typically have documents that can provide some answers.

1. Order Execution Policy Check if the broker identifies itself as a "principal" or counterparty for all orders, how it specifies execution venues or liquidity providers, and whether it explains the management of slippage in both directions.
2. Conflicts of Interest Policy Under frameworks like FCA SYSC 10 and ESMA, firms must identify and manage conflicts of interest. This document often discusses acting as a counterparty and hedging.
3. Client Agreement Look for terms like counterparty, principal, and hedging, which indicate who is on the other side of the contract.
4. Regulatory Authority Register Verify that the claimed license belongs to the same legal entity with which the client opened an account, as the rules above protect only entities under that specific authority. Verification steps are detailed in Is Your Forex Broker Trustworthy? 7 Steps Before Depositing Funds.
5. Regulatory Disclosure Documents Such as the hedging counterparty policy, which ASIC's RG 227 recommends CFD issuers publish on their website, along with a list of counterparties.

A limitation to acknowledge: these documents state policies, not how each individual client order is handled. Hybrid brokers may change client categorization at any time. What these documents do help with is understanding whether the broker acknowledges acting as a counterparty and how it has established mechanisms to manage conflicts of interest.

Frequently Asked Questions

Important Note: Forex trading is not yet licensed or regulated by any authority in Thailand. The Bank of Thailand has no policy to issue licenses for retail Forex businesses (Reference: Thai PBS), and the SEC itself confirms that the Forex business is not under its supervision but rather under foreign exchange control laws (Reference: The Standard).

This article is provided for general knowledge only. It is not personal investment advice, and there are no guarantees of returns. Traders should conduct further research and assess risks independently before making any decisions.

Is a B-Book broker illegal or a scam?

B-Book is a risk management model; it does not inherently mean fraud. Authorities like ESMA classify acting as a client's counterparty as one of the commonly found models and impose duties on firms to manage and disclose conflicts of interest. What ESMA considers should be avoided is acting as a counterparty without any hedging. The legal status of Forex trading in Thailand is a separate issue, explained in Is Forex Trading Illegal? Latest Legal Status in Thailand.

How do ECN and STP differ?

Both models route orders without a dealing desk in between. STP sends orders to liquidity providers chosen by the broker and typically earns revenue by adding a spread markup. ECN, on the other hand, brings orders into a network that aggregates prices from multiple participants, usually displaying raw spreads and charging separate commissions.

Does an account named ECN mean the broker is entirely A-Book?

Not necessarily. The account name indicates the pricing and fee collection method. The decision of how much risk to pass on is part of the broker's risk management policy, which should be reviewed in documents like the Order Execution Policy and Conflicts of Interest Policy.

Is a Market Maker always a B-Book broker?

Not always. A Market Maker acts as a client's counterparty and sets its own prices, but it can hedge the net sum with liquidity providers. ESMA classifies this as the first model: acting as a counterparty but hedging all orders, which differs from models that do not hedge at all.

References

• ESMA, Questions and Answers relating to the provision of CFDs and other speculative products to retail investors under MiFID (ESMA35-36-794, 31 March 2017)
• ESMA, ESMA publishes updated Q&A on CFDs and other speculative products (2016)
• ESMA, ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors (2018)
• FCA Handbook, COBS 11.2A Best execution (MiFID provisions)
• FCA Handbook, SYSC 10.1 Conflicts of interest
• ASIC, REP 579 Improving practices in the retail OTC derivatives sector (2018)
• ASIC, REP 579 Full Report (PDF)
• ASIC, RG 227 Over-the-counter contracts for difference: Improving disclosure for retail investors
• ASIC, RG 227 Full Report (PDF)
• BIS, OTC foreign exchange turnover in April 2025 (Triennial Central Bank Survey)
• Thai PBS, BOT confirms no policy to license retail FOREX businesses
• The Standard, SEC confirms Forex business not under its supervision, but under foreign exchange control laws