📌 1. Introduction: How Do Forex Brokers Actually Work?
Most retail traders believe their forex broker simply connects them to a real market where they trade directly against other traders or liquidity providers.
💡 Reality Check: That’s not how it works!
Retail forex brokers are not real brokers. They are actually dealers who take the opposite side of your trades.
Instead of acting as intermediaries, they become the counterparty to your trades.
📌 2. Who is Your Counterparty?
Every time you place a trade, someone needs to take the opposite side of it.
✔️ If you buy EUR/USD, someone has to sell it to you.
✔️ If you sell EUR/USD, someone has to buy it from you.
In retail forex trading, that “someone” is your broker!
✅ Your broker always takes the opposite side of your trade unless it decides to hedge its exposure.
🔹 This means if you win, the broker loses.
🔹 If you lose, the broker wins.
📌 The forex broker is NOT your friend. You are a customer, not a client.
📌 3. Why Are Retail Forex Brokers Actually Dealers?
Most people think brokers simply match buyers and sellers, like a stock broker.
💡 Reality: Retail forex brokers create a market for you instead of connecting you to an actual forex exchange.
✔️ Retail traders can’t access the real institutional forex market.
✔️ The broker creates a price for you based on liquidity provider feeds.
✔️ Your trades never reach the real forex market.
📌 So what does this mean for you?
🔹 The price you see on your trading platform is NOT the actual forex market price.
🔹 Your broker can manipulate prices because they control the trading environment.
🔹 You are trading in an artificial market created by your broker.
💡 Your broker decides how to execute your order—either by keeping the risk or offloading it.
📌 4. How Brokers Manage Their Risk
Because brokers take the opposite side of your trades, they need to manage their market risk.
There are three main ways brokers handle risk when you place a trade:
1️⃣ Offset Opposing Trades from Other Customers (Internal Hedging)
2️⃣ Transfer the Risk to an External Market Maker (A-Book)
3️⃣ Accept the Risk Themselves (B-Book)
Each approach determines how the broker makes money and whether there’s a conflict of interest with its traders.
📌 5. Type 1: Internal Hedging (Offsetting Customer Trades)
✔️ If one trader buys EUR/USD and another sells EUR/USD, the broker can match them internally.
✔️ This offsets their exposure, so the broker has zero market risk.
✔️ The broker profits from the spread without worrying about price movement.
✅ No conflict of interest. The broker makes money whether you win or lose.
❌ Problem: This method works best when there are many traders with opposing trades. If most traders are on the same side (e.g., all long EUR/USD), the broker has huge exposure.
📌 6. Type 2: A-Book Model (Passing Trades to Liquidity Providers)
✔️ The broker sends your trade to a liquidity provider (LP).
✔️ The LP takes the other side of the trade instead of the broker.
✔️ The broker makes money from spreads and commissions rather than your losses.
✅ No conflict of interest because the broker is not taking the other side of your trade.
❌ Problem: A-Book brokers make less money than B-Book brokers, so they often charge higher spreads or commissions.
🔹 A-Book brokers are more transparent, but they are rare. Most brokers use a hybrid model.
📌 7. Type 3: B-Book Model (Taking the Other Side of Your Trade)
✔️ The broker takes the opposite side of your trade.
✔️ If you lose money, the broker keeps your losses as profit.
✔️ If you win, the broker has to pay you out of its own money.
📌 B-Book brokers profit directly from your losses!
✅ B-Book brokers can offer lower spreads and no commissions.
❌ Conflict of Interest: Your broker makes more money when you lose!
❌ Risk of Price Manipulation: The broker controls the price feed and can stop hunt or widen spreads to cause margin calls.
💡 Most retail brokers are B-Book brokers.
📌 8. Hybrid Model (A-Book + B-Book)
Most brokers use a hybrid model to maximize profits.
🔹 Small traders and losing traders go into the B-Book (broker takes the other side).
🔹 Profitable traders and big accounts go into the A-Book (trades are sent to liquidity providers).
📌 Brokers use algorithms to determine which traders should be A-Book or B-Book.
✔️ If you win too much, your trades are sent to the A-Book.
✔️ If you keep losing, the broker will keep you in the B-Book and profit from your losses.
📌 9. How Do Brokers Make Money?
✔️ Spread: The difference between the buy and sell price.
✔️ Commission: A fee for opening and closing trades.
✔️ B-Book Profits: If you lose, the broker keeps your money.
✔️ Slippage: Executing your order at a worse price than requested.
✔️ Swap Fees: Interest charged on overnight positions.
💡 Most brokers make the MOST money from B-Book profits (your losses).
📌 10. How to Identify a Good Broker
🔹 Does the broker have a conflict of interest?
🔹 Does the broker manipulate spreads or execution?
🔹 Is the broker regulated?
🔹 Does the broker process withdrawals quickly?
🔹 Does the broker allow scalping and profitable strategies?
✅ A reliable broker should be transparent about its execution model.
📌 11. Key Takeaways
✔️ Retail forex brokers are NOT real brokers. They are market makers (dealers).
✔️ Your broker is your counterparty—it profits when you lose.
✔️ There are three execution models: Internal Hedging, A-Book, and B-Book.
✔️ Most brokers use the B-Book model and profit from your losses.
✔️ Hybrid brokers move profitable traders to the A-Book and losing traders to the B-Book.
✔️ Understanding how your broker operates is critical to your trading success.
💡 If you trade with a B-Book broker, always be aware that your broker profits from your losses! 🚨
