As seasoned FX Professionals we frequently see traders on blogs, forums and numerous websites providing inaccurate information about Brokers and their operations. For this reason we believe that it is necessary to educate traders about the different Broker models and how these operate behind the scenes. To begin our Behind the Brokers series we will start with educating our readers on the most popular Brokerage model employed by Retail FX Brokers, the Market Maker model.
The Market Maker model in Retail FX is one which operates under a rather simplistic approach, the Broker provides its clients with a market to trade FX (Trading platform/Pricing/Margin) and in turn the Broker will operate as the counter-party to each and every trade entered by their clients. Like all Brokers, Market Makers are in business to turn a profit and as the counter party to all their clients’ trades they will earn a profit so long as their traders’ net Profit/Loss is negative.
This Brokerage model is also commonly referred to as a “B-Book” model, whereby the client’s trades are not hedged or traded onward to another venue/counter-party and are held solely on the Brokers own books. It is important for all traders who trade with a Market Maker to realize that although they are your direct counter-party, your Broker does not control the actual FX market and major market moves are not coming directly from your Broker to take you out of a trade but instead the prices are coming from their Liquidity Providers, the real Market Makers.
Even though Brokers may provide their clients with a market where they can trade FX and whereby they profit from client losses, what is often ignored or inaccurately reported is that these Brokers are fully dependent on their Liquidity Providers who are responsible for the pricing of the actual FX Market and who care very little about Retail traders holding positions with a “B-Book” Brokerage.
It is these inaccuracies which we regularly read on FX forums and sites where disgruntled traders are quick to blame their “bad luck” on the model utilized by their Broker, which brings us to our next article “Why you should not fear a Market Maker”, where we will address these client issues and look to dispel some of the inaccuracies which may negatively influence traders looking to choose the right Broker.