Are your losses the brokers profits? And does it really matter? Now in this short video, I want to talk to you specifically about the broker. Is the broker your friend or enemy? Now, much is said about the forex market and the involvement of the broker. I’m sure you’ve heard those conspiracy theories that the broker is out to get you. That the broker is always looking to see where you’ve placed your stops in order to stop you out and make you lose money. So we’re gonna discuss. Is this true? Well before we answer this question, we need to explore the different types of brokers. How they’re structured and how they’re set up.
You have two different types of broker. You’ve got what we known as the “A-Book Broker” and the “B-Book Broker”. Simply put, an A-Book Broker, now, he will funnel your trades straight through to the interbank market and match your trades with some other trader somewhere else in the world. He doesn’t care whether you make or lose money. Now, he will make his commission by charging you a small commission per trade or transaction. And sometimes make some money by increasing the spread from what he’s getting from the interbank market. Now on the other hand, a B-Book Broker, now, he will be taking the other side of your trade. So if you win $100 on the trade, he’s gonna lose $100 on that trade. Now as you’d expect these brokers will literally have thousands of clients from all over the world and these traders are classified in two ways. First of all, you’ve got the profitable traders. Now that’s those that make consistent gains over a period of time. Not just one big gain. Then you’ve got the losing traders. Now these will make consistent losses over a period of time. All those that just come into the market with $500,000 and want to gamble away their account and end up blowing up.
Now a broker will typically know if you’re likely to be a winner or a loser. So how do they know this well? They employ what are known as “Quantitative Research Statisticians” also known as the “Quant Guys”. And these are basically employed to build fancy statistical models that define the traits of a losing trader. For example, they will look through your trading history and identify the leverage used, where you place you stop, the time is the day that you’re trading, the number of trades and so forth. It will help them build a picture over the long term on how you’re likely to perform. If their analysis deems you as a losing trader over the long term, they’re going to funnel your orders into the B-Book. Basically meaning they’re going to be taking the other side of the transaction.
So for example, if you’re buying the Euro/USD, they’re gonna be selling you that and they’ll be taking the other side of the trade and therefore the market risk. If you make money on the trade, they will lose money on that trade. Now if the quant guy identify you as a profitable trader, he assumes you’re gonna make money in the long term. If the broker simply will then push your order through to the liquidity providers he won’t take the other side of the trade. But be absolutely ludicrous for him to take the other side of the trade. If his quant guy is telling them that basically, you are a profitable trader over the long term. So how does this affect you? Well, I don’t think it does really. And in fact you’re pretty much unlikely to know whether your trades are going to be placed on the A book or the B-Book. Although I guess it would be quite nice to know if you are on the B-Book that these highly sophisticated quant guys deemed you as a loser, you may want to change what you’re doing.
Do the B-Book brokers that’s those taking the other side of the trade always make money? No, of course not. They will have their losing periods as well as traders become profitable. Usually during the trendy markets. But the quant guy knows that in time you’ll eventually give the money back to them so they just let It continue. If you were to become a consistently profitable trader over time and the losses were and the gains were substantial, they would simply move you from the B-Book back to the A-Book. But again, you wouldn’t even know about that. Some brokers will either be one of the two, they will either be A-Book or B-Book and some brokers will have both capabilities.
There’s also another type of broker which are known as the “Dealing Desk Broker” or the “Market Maker”. These are also B-Book brokers. But they basically, wrap a price around the interbank market price, and they will give you a fixed spread. Unlike the STP broker where you have floating spreads the —- quotes are always changing. The broker will have complete discretion or whether or not to fill your order. Generally speaking there is no commission charged with a dealing desk broker. But it was make his money on the spread and your expected losses. If the broker constantly loses money by taking the other side of your trade and the losses are substantial, he may not want your business going forward.
Knowing if your broker is a dealing desk broker or a market maker is quite important. A dealing desk broker is more likely to face accusations, accusations of unfair execution because he’s filling your orders at total with total discretion. Your losses are their gains, but more important your gains are their losses. So this could affect the executions if you’re trading with a notable size.
Look, at the end of the day, if your broker that you’re using is regulated, it’s highly likely they’re not going to be corrupt. And all that to get you they’re not desperate to fill your stocks. But quite frankly there are enough losers out there capable of blowing up their trading accounts that they don’t really need too. Many failed traders believe that it is a conspiracy theory. They believe that the brokers are evil. The true fact of the matter is the reason why traders fail is not because of the broker, it’s because of the trader. I mean look,, if you’ve had a bad experience with your broker, do drop me a line.
Leave a comment below. I’d love to hear from you. If you liked the video give me a thumbs up. If you don’t like the video give me a thumbs down. As I said before I’m big and bold enough to take criticism. Good luck with your trading careers and I’ll see you in the next video..
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