How Do Brokers Make Money From You?

Recently I was interviewed by a forex broker about my knowledge of the TradingView platform.

But it wasn’t just any broker.

It was a highly reputable Australian-based A-book broker.

And don’t worry – if you have no idea what an A-book broker is, you’re not the only one.

I’ve been trading for over four years now, and in that time I’ve never really done any research into the backend of brokers and how they operate. I just assumed that because the brokers I use are regulated by financial authorities, they can’t be doing anything too shady.

But after Ivan Delgado from Global Prime reached out and asked to chat and explained to me what Global Prime was all about and how they operated, I went down the rabbit hole of studying A-book and B-book broker models and how brokers make money from you as a trader.

Today’s blog post will break down the key things I’ve learned in my research.

(I learned the majority of this information from Global Prime’s great YouTube series titled “How Forex Brokers Make Money“. I definitely encourage you to watch it if you have time!)

What Is A B-Book?

A B-book is essentially a ledger of trades held by your broker listing trades which you placed, but these trades were not actually sent to the underlying market.

In essence a B-book broker simulates the real markets and your trade fills are based on the underlying market, but your trades are never actually sent there.

Why would a broker do this?

One, it’s perfectly legal.

And two, most retail traders lose money in the markets – so not only does it make sense to take the opposite side of their trades, it is a booming business.

B-book brokers profit from the losses of their clients, and they lose money when their B-book clients win. Essentially, they are run like a casino.

If you win often enough and consistently enough so that it’s hard for your broker to profit from you or hedge your positions then you get placed on the A-book, which means your trades are sent through to the underlying market instead of you giving your money straight into the pocket of your broker, and you are treated like an actual human being instead of like a sucker.

As General Manager of Global Prime Angus Walker says regarding the B-Book model: “It’s not just profiting from the loss, it’s a model that is rigged in order to become incredibly efficient at that.”

Now, to be perfectly honest and clear about my opinion on this from the outset: from an objective business standpoint, running a B-book broker makes perfect logical sense. I can see why most brokers, which are for-profit companies like any other, go with this model as it’s the most profitable for them.

The problem for us as traders and clients of their services is the conflict of interest this B-book model creates.

The problem for a B-book broker is that once you begin profiting from your clients’ losses, it completely warps the client-broker relationship into one where you either want your clients to downright fail so you can absorb their entire account balance – or in the very least, you would prefer that it take them a long time to succeed.

What this creates is an atmosphere and culture of seeing your clients as prey rather than customers.

I think this explains why most brokers have terrible support services, little to no information on how they actually make money, lackluster trading education offerings and dangerous products such as unreasonably high leverage with zero or near-zero requirements to prove you know how to handle that leverage without blowing your account(s).

Using a B-book broker to trade is kind of like going to a drug-dealer to seek help getting clean from drugs.

Essentially, a B-book broker is a casino, and they want clients who are gamblers, not traders – and if their clients happen to ruin themselves financially, they could care less.

Whereas an A-book broker is a business that offers their services to professional traders.

They don’t profit if you ruin yourself, and in fact if that were to happen then they lose a valuable client and therefore revenue from the fees and commissions they charge you – so their incentive is to help you stay profitable and do everything they can to keep you around and growing as a trader so that you can trade bigger and longer.

The ironic thing is that most A-book brokers can offer you everything a B-book broker can – from products to competitive fees – so the real question is… why would you ever want to trade with a B-book broker once you understand how they work?

Let’s explore these two models in more detail.

Profiteering From Retail Traders

During their discussion on how forex brokers make money, co-founder of Global Prime Jeremy Kinstlinger quotes an interesting ASIC report.

The report revealed that in 2018 over $2 billion was lost in binary options & CFDs in the Australian retail trading industry – and this equated almost perfectly to the revenue of those brokers over that same time period.

Angus Walker (ex-General Manager of IC Markets) is extremely critical of the B-book model after having witnessed how it operates from behind the scenes of the industry.

He calls it a “toxic business model”, and the 98%+ of B-book operated brokers who profit from their losing clients have zero incentive to raise awareness of the traps that retail traders can fall into if they are not properly educated about the risks they are taking in financial markets – especially when it comes to the use of leverage.

B-book brokers tend to allow their clients to experience high drawdown levels, and they usually permit low margin requirement levels, all combined with the allowance of extremely high leverage – and this is done intentionally in order to encourage blow-up over success.

Your money is your money and you can spend it how you like – if you want to treat the markets like a casino, that’s fine.

But if you’re unaware that you’re gambling your money in a casino run by your broker – then that’s a problem of communication and education, and perhaps even an ethical problem.

Excessive leverage can lead to you blowing up before you have the chance to educate yourself, and offering high leverage with minimal requirements is a common trait of B-book brokers.

And given that the majority of brokers operate a B-book model and profit directly from retail client self-destruction, then perhaps this accounts for at least part of the reason why it’s alleged that 90% of traders lose 90% of their account balance within 90 days of beginning their trading journey.

But in any case – even if you don’t have access to high leverage, if your broker profits from your losses, then they have no incentive to help you educate yourself and get better at trading.

One could argue that it’s not the broker’s responsibility to educate their clients on how to trade. And I actually agree 100% with that argument. We all make our own decisions, and it’s our own responsibility to inform ourselves and educate ourselves on the risks we take.

It’s not McDonald’s responsibility to educate you about the dangers of eating a Big Mac for breakfast every day.

But, when McDonald’s is also in charge of the dietary information you receive regarding their products – it becomes a little bit cloudier, and the boundaries of responsibility begin to overlap.

What About Regulation?

A big question regarding B-book models is why financial regulators allow them to operate at all.

Recently financial regulators in Australia made a push to protect retail traders from themselves. This information is taken from the ASIC report I mentioned earlier:

“We believe our proposed conditions for CFDs are the most appropriate regulatory action to reduce the significant detriment suffered by retail clients. Our conditions:

• Impose leverage ratio limits
• Implement a standardised approach to automatic close-outs of retail client positions
• Protect against negative balances
• Prohibit certain inducements
• Require enhanced transparency of CFD pricing, execution, costs and risks.”

All of these interventions from the Australian financial regulator ASIC make sense to implement.

The only measure I’m not 100% in agreement with is the reduction of permitted leverage ratios. Australian retail traders can now only access a maximum of 30:1 leverage on forex markets, which is a significant reduction from 100:1+ that used to be allowed.

But I don’t believe high leverage itself is responsible for most retail trader implosions. Rather it is the lack of understanding of how dangerous leverage can be. Many retail traders, especially those new to trading, typically have no idea what good “risk management” looks like.

For a professional or experienced retail trader, high leverage can be a powerful tool in exploiting certain opportunities in the markets (especially on the lower timeframes where large position sizes are necessary in order to profit from miniscule movements in price).

I think it would make better sense to allow retail traders to access high leverage, but only after they’ve proved through some kind of test or survey or probation period that they thoroughly understand the risks and traps that the use of high leverage can create.

But to be fair, simply reducing the amount of leverage retail traders can access does reduce how quickly they can blow their accounts. So while I think it’s a bit of an over-reaction to the problem, it does make it harder for B-book brokers to let their clients blow up.

And as for the rest of these measures – I’m surprised it took so long for them to be addressed to be honest.

Having a standardised approach to closing out a retail trader’s positions if their trades are going against them so severely that they risk blowing their account is a perfectly logical measure.

If you work for a professional trading institution like a prop firm or hedge fund, there are risk measures put in place to prevent their traders from blowing up.

Firms like SMB Capital are very open about the fact that their traders have daily risk limits, and if their risk limits are hit, then they are no longer allowed to trade and are forced to take a break. This is to protect the firm from exorbitant losses, and to protect the traders from themselves and prevent then from trading on tilt in highly negative and unconducive emotional states.

A retail trader has no such oversight. They set their own risk limits, and if their risk limit happens to be their entire account, then there’s a non-negligible chance they will blow their entire account.

While it’s not the broker’s responsibility to manage their clients’ risk for them, having automatic measures put in place to protect retail traders from trading on tilt and prevent them from taking such high risks that they are practically guaranteed to blow up is a great idea.

I’m guessing the only reason it has taken so long for this to be made into a rule is because of the B-book model. B-book brokers don’t want their traders to manage their risk properly because it means less profit for them – so why on earth would they implement automatic protections to protect inexperienced traders from letting losing trades go against them?

It’s the same issue with negative account balances. If you are trading through a B-book trader and your account goes into the negative, it really means nothing. The broker hasn’t lost any money, because they never sent your trades to a third-party. They can simply reset your account balance to zero if they want to, and because they don’t owe anyone any money on your behalf, it’s basically a fake debt.

The only reason a B-book broker would pursue a client for repaying their negative account balance would be to exploit the client and make even more money out of them than they took when that client blew their account – which is just another reason why the B-book broker model is a toxic model.

As for prohibiting inducements – this just means that brokers can no longer incentivize traders to trade more actively through offering prizes and gifts. Any broker that encourages you to take undue risk by trading larger or more frequently than you normally would is almost certainly a B-book broker who is profiting from your losses.

And then there is the final condition that ASIC have imposed on the retail trading industry – “Require enhanced transparency of CFD pricing, execution, costs and risks.”

Really? Why was this not a rule from the beginning? Allowing brokers to offer financial products that are non-transparent and do not have clear information on their pricing and execution models is insane to me. But hey, it’s better late than never, right?

It’s good that ASIC have forced these B-book brokers to reduce these shady practices which have exploited ignorant retail traders for the past few decades.

But at the end of the day, none of these regulatory measures address the elephant in the room: the B-book profit model.

So long as brokers are allowed to directly profit from trading against their clients, there is a huge conflict of interest.

Brokers can no longer offer enormous leverage ratios, allow retail clients to leave losing trades open indefinitely until their account drains to zero or even into the negative, they are no longer allowed to offer incentives to encourage traders to take undue risks, and they now have to be more clear and transparent on how their products are priced and executed.

But they still profit from the destruction of their own clients. So long as that is the case, they will continue to find new ways to “encourage” their clients to lose money and remain uneducated about the proper ways to trade and manage risk.

Why Care About Any Of This?

Interestingly enough, the actual difference between the products offered by an A-book and B-book broker are not that big.

The main exception is leverage. If a broker can offer greater than 1:100 leverage in the forex markets, it’s likely they operate a B-book because beyond that ratio the credit risk to third-parties who are involved with your brokerage dealings is too high.

But high leverage is usually used by traders who are inexperienced anyway. The more experienced you are as a trader, the less you depend on leverage to make your profits; and the more money you make as a trader and the larger your account balance is, the less leverage and margin you require in the first place.

Unless you’re trading the 1-minute timeframe with MASSIVE position sizes, or you’re a beginner trader with a very small account balance, then you should rarely require greater than 30:1 leverage.

And so high leverage, while useful under certain circumstances for professional traders, is typically a trap instead of a benefit. It’s a double-edged sword. It enhances your profits while simultaneously enhancing your risk.

If a B-book broker offers high leverage, it’s usually because they want you to blow your account – because they want your money. You can see here how the misalignment of incentives can be a problem.

If your broker is chomping at the bit to see you blow your account – do you really think they have your best interests are heart? Do they really care about your financial well-being and independence goals? Do they have any incentive whatsoever to see you succeed, or help you succeed?

It explains why Oanda so many brokers have a terrible support system that can sometimes take days to respond and usually are about as helpful as throwing your computer out the window.

This is really the main reason why you should care if your broker is a B-book or A-book broker.

It’s not because a B-book broker can’t offer you what an A-book broker can, or because an A-book broker is on your side and wants you to succeed because they make no money if you lose – it’s because they have a much higher incentive to make sure that their service is high-quality so that you stick with them.

(Side note: a few months ago I was trying to withdraw $10,000 from my Oanda account but kept running into an extremely vague error that said “something went wrong”. When I reached out to their support team it took them days to respond, and once they finally got in touch they couldn’t help me fix the issue for over a week and a half! Needless to say, I began broker-shopping soon after which is part of the reason why I’ve been exploring these concepts so heavily recently.)

A-Book Incentives

There’s a common misconception that trading is a zero-sum game.

As Mike Bellafiore from SMB Capital once said:

The irony of this is if you are trading with a B-book broker then it is a zero-sum game, since they are literally trading against you no matter what time frame or market you’re trading on.

If you profit, they lose; and if you lose, they profit. This is not true if you’re trading against other traders – ie. directly to the underlying market through an A-book broker.

Having a broker who profits when you profit is like having them as an ally instead of just a facilitator – or in most cases, an adversary.

An A-book broker typically profits from a handful of things: spread, commission costs, swap fees and a cut of the interest earned on your open positions.

This means that an A-book broker doesn’t want you to blow up your account. If you blow up, they don’t make any money – in fact, they lose a valuable client and source of revenue.

They make their money when you make money. They want to see you become profitable – because they want you to trade bigger, longer, and consistently, so that they make more money from the fees they charge you.

Obviously this introduces a new incentive – to charge you as much as they can get away with for your trading.

But luckily trading is such an immensely competitive environment that most trading costs have been whittled down to a fraction of your profits whether you’re a B-book trader or an A-book trader – so it really doesn’t matter. You won’t be paying more to use an A-book broker than a B-book broker.

So the key takeaway is this: do you want to give your hard-earned money to a broker who is incentivized to help you become more profitable and stay profitable, or a broker who not only doesn’t care what happens to you – but makes money when you fail?

Why I Quit Oanda & Moved to Global Prime

I’m now a client of Global Prime, and I do all of my trading through their platform.

This is not a broker recommendation – depending where in the world you live, you might not even be able to use Global Prime since they are an Australian-based and regulated broker.

I’m not being paid to say any of this – I just want to be transparent and open about my experiences as a trader.

I started this blog in 2017 to document my journey as a trader, and this shift from Oanda to Global Prime is as much a part of that journey as becoming consistently profitable was.

Last week I withdrew all of my money from all of my Oanda accounts and moved them into Global Prime, and the process was practically seamless. I even have my automated PineConnector scripts trading through my new Global Prime MetaTrader account – and it’s already up +3%.

I’ve used Oanda as my main broker from the beginning. And as far as I know, given that I haven’t been a consistent losing trader in some time, I imagine they have me placed on their A-book and so none of this B-book stuff directly affects me.

And yet, I have still decided to leave their platform and move to Global Prime. Here is why:

• Oanda’s support team SUCKS
• Global Prime recently integrated with TradingView, so the shift is mostly painless in terms of my trading process
• I am captivated by Global Prime’s transparency and openness – I can even chat directly to the founders and management whenever I want to through their public Discord server. Good luck getting in contact with Oanda’s management so easily!
• Global Prime constantly release valuable education and information on their social media (including their YouTube channel – which inspired this entire blog post)
• Global Prime have “created a platform and community that educates and empowers traders to win. Traders should focus on their trading, not their broker.“
• Global Prime’s spreads and costs are the same, if not cheaper than Oanda – so given that GP’s staff, community and liquidity providers are superior to Oanda’s, why wouldn’t I make the move?

The main reason I kept using Oanda for so long is because their platform is fully integrated with TradingView, and they allow me to trade in any position size (units instead of lots).

But now that Global Prime is fully integrated with TradingView the same as Oanda is, and I’ve grown as a trader to the point where I can trade in lot sizes without it affecting my risk too much, I feel comfortable making the move.

And I’m stoked to have found a new home – a place where the other traders who use Global Prime are as passionate and motivated as I am to succeed and grow as a trader, and even the staff are happy to chat at any time and are also motivated and incentivized to help me do what I do.

I hope you found this article interesting – if you want to learn more about how brokers make money, make sure to watch this entire YouTube series. It’s fascinating.

Take care, and good luck with your trading.

– Matt.

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