A Book and B Book and Hybrid
Hello, this is Capital Cat! TodayA BookandB Bookwill be explained regarding the FX broker's order processing model, and also about its relationship with Japanese securities firms and operational characteristics.
What is the A Book model
A Book modelis a system where the broker passes customer orders directly tothe market (interbank market or liquidity providers)without internalizing them.
Characteristics
- High transparency：
- Customer orders are processed at real market prices, and the broker has a low risk of price manipulation.
- Broker profit：
- Brokers earn revenue from spreads (difference between bid and ask) and trading commissions.
- Relation to customer profit：
- Because the broker's profit depends on customer trading volume, whether the customer profits or incurs losses does not directly affect the broker's revenue.
Benefits and drawbacks
| Benefits | Drawbacks |
|---|---|
| Ability to trade based on market prices | Spreads can widen at times |
| Customer and broker profits do not conflict | Possible delays in execution during low liquidity |
What is the B Book model
B Book modelis a system where the broker processes customer ordersinternallywithout sending them to the market, with the broker taking the opposite position to the customer for the trade to be established.
Characteristics
- Broker acts as a market maker：
- The broker quotes prices independently and serves as the counterparty to the customer's trades.
- Broker profit：
- Customer losses become the broker's profit.
- Transparency issues：
- Some brokers may offer unfavorable prices, and since customer profit/loss directly affects broker profit, there is a risk of conflicts of interest.
Benefits and drawbacks
| Benefits | Drawbacks |
|---|---|
| Can offer narrow spreads | Broker's interests may conflict with customer profits |
| Execution speed is fast | Trade prices may diverge from the market |
Characteristics of Japanese securities firms
Japanese securities firms mainly adopt the B Book model, but in recent years,hybrid modelsare being introduced by more brokers.
Features of Japanese FX/CFD brokers
- High reliability：
- Regulation by the Financial Services Agency is strict, with strong monitoring of transparency and operating structure. It is advisable to avoid brokers not registered with the FSA.
- Low leverage regulations：
- In Japan, FX leverage for individual investors is capped at a maximum of 25x. This reduces risk but makes it harder to grow profits compared to overseas brokers.
- Competition in spreads：
- Competition among brokers is intense, with many offering tight spreads. Very tight spreads are available for major pairs like USD/JPY and EUR/JPY.
Main Japanese securities firms
- GMOクリック証券：
- One of the largest trading volumes domestically, characterized by narrow spreads.
- DMM FX：
- In addition to narrow spreads, offers strong beginner support.
- SBI証券：
- Highly rated not only for FX but also for stock trading and NISA accounts.
- 楽天証券：
- Linked with Rakuten Points and a wide range of tradable products.
Models used by Japanese securities firms
Many Japanese securities firms employ the following schemes for FX trading.
- Hybrid model：
- Small-quantity trades and short-term traders are processed by the B Book, while large investors and professionals are typically routed to the A Book.
- Collaboration with liquidity providers：
- When processed by the A Book, trades are executed through domestic and international liquidity providers (major banks and financial institutions).
Summary
- A Book modelis a market-price-based, highly transparent model with long-term reliability.
- B Book modeloffers fast execution and is suitable for small trades, but requires caution due to potential conflicts of interest with brokers.
- Japanese securities firms operate under strict regulations and are highly reliable, but leverage restrictions mean you need to be creative to grow profits.
Choose a broker that fits your trading style and understand how A Book and B Book work to trade with more peace of mind!
