When establishing a Forex brokerage company, you need to decide which business model you want to follow. You can either choose an A-Book business model called Straight Through Processing (STP) or B-book model called Dealing Desk Processing. However, there’s also a possibility to pursue a hybrid model, which is the combination of the two. Below you’ll find the pros and cons of using each of them.
In the case of the STP model, the customer’s order transactions using the broker’s Forex platform, then the orders are forwarded to the liquidity providers with whom the broker entered into the partnership agreement. Next, the liquidity providers inform of their most beneficial price for the requested instrument, and the customer’s order is executed through the liquidity provider who has offered the lowest spread. The brokerage company absorbs a part of the trader’s spread in exchange for granting access to the liquidity provider or a commission fee. This model is considered as simpler because the broker’s role in the trade is very limited.
In the second, B-book approach, brokers take an opposite position on the market to their traders and their role is more active since they deal with counter trading. As a result, they gain more profit, but on the other hand, there’s a bigger risk of the loss of funds by being caught on the wrong side of a trade. This model requires more technical knowledge and experience.
Some traders use a combination of the two and offer both trading models. It is important to know how to select a business model to a particular customer. For those traders who are afraid of desk dealing model because of conflict of interest between them and their brokers due to standing on the opposite side, they offer the A-Book model, and for those interested in the lowest spreads possible, they offer B-Book model.