One of the common questions that we have been asked and you will find all over the internet. The truth is that some brokers do trade against their clients. But what does this mean to you a trader? Does this have a negative impact on your trading? and does it really matter?
It is really a secret — nor is it actual cheating the client — but it is something that a lot of people may not even be aware of.
Not all brokers operate in the same way, but most brokers will run an— A Book & B Book. This is the most common setup for a so-called market-making broker.
Some brokers take the trades and pass these on to another venue which we will explain in another article.
The main thing is that by trading CFDs and Forex the contract is always between you and the broker. You never own the instrument that you are trading. Technically the broker is always trading against you. It is how they manage the risk themselves that makes the difference.
This is part of Market Making, the broker offers you a market to trade on. It’s up to the broker how they are filling the orders that you enter via the trading platform. All regulated brokers are under strict supervision these days and need to provide the best execution to their clients.
1) A Book
When it comes to A Book, they are trading against their clients, but only in a technical sense. In other words, they do take the opposite side of the trade, but they tend to take a risk-neutral approach to the market. The goal is to offset the trade as soon as possible,
Clients that are treated in this way are usually considered profitable, and no one wants to trade against profitable traders. (
2) B Book
When it comes to B Book, the broker will be a bit pickier when it comes to choosing what position of their own clients they want to offset. In other words, they might take a directional position and may actively trade against their clients. Instead of putting your trades in the market, they take the risk with their own capital. If you are successful it will cost them money and the other way round.
Picking the right broker
If you are new and you don’t want to lose all of your money in a few months, at best, you will need to keep in mind some things about your brokers, especially when it comes to how to choose the right one to work with.
Only deal with an established broker and have the right credentials. In other words, the broker should be regulated by a respective financial authority for that country.
Some brokers, especially those located in offshore areas like Belize, Seychelles, Vanuatu, Saint Vincent, and the Grenadines, typically don’t follow particularly strict requirements compared to UK and EU brokers and shy away from any form of regulation, so it’s generally wise to avoid them altogether.
Once you limit your choice to a few regulated candidates with a prudent reputation, the next thing is to compare their trading conditions and choose the ones that fit your requirements the best.
In conclusion
In the end, the important thing to remember is that brokers do tend to trade against their clients and that you should be aware of it. Does it really matter? Not really as long as your orders are executed according to the best execution policy. More than that, you should be aware of an awful lot of things if you wish to become a successful trader, and you should never stop looking for new information.
Whether the information is about your broker, the asset you are interested in, the market, or the current events that might impact the market — you must always keep an open eye and look for any information that can give you a chance to make the best possible move at any given time.
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