A-book, B-book and hybrid: how brokers handle client orders
The three ways a broker can execute client orders, how each makes money, where the risk sits and what technology each one needs.
When a client presses buy, the broker has to decide what to do with that order. The answer defines the broker's revenue, its risk and its obligations. There are three models.
A-book: pass it on
In an A-book model the broker sends the order to a liquidity provider and earns a markup on the spread or a commission. The broker is not exposed to whether the client wins or loses, so its interests are aligned with the client trading more, over a longer period.
B-book: take the other side
In a B-book model the broker keeps the order in-house and becomes the counterparty. Client losses are broker revenue, and client profits are broker losses. Margins can be higher, but so is the risk, and the conflict of interest must be managed and disclosed as regulation requires.
Hybrid: route by risk
Most established brokers run both. Orders are routed by rules, such as trade size, instrument or client history: some are hedged in the market, others are kept in-house. The skill lies in the routing rules and in watching exposure in real time.
Side by side
| A-book | B-book | Hybrid | |
|---|---|---|---|
| Revenue from | Spread markup, commission | Client trading losses, spread | Both |
| Market risk to broker | Low | High | Managed |
| Capital needed | Lower | Higher | Depends on the mix |
| Key technology | Bridge, liquidity | Risk management | Routing rules and both of the above |
What each model needs from technology
- A bridge to send orders from the platform to liquidity providers, with low delay.
- Real-time exposure reporting, so the dealing desk sees net positions by symbol at any moment.
- Risk rules that can move a client or an order between books automatically.
- An audit trail of how every order was executed.
Which should a new broker choose?
That depends on your licence, your capital and your appetite for risk, and it is a question for your legal and risk advisers. From a technology point of view, build for hybrid even if you start with one book. Changing models later is much easier when the routing and reporting are already in place.
Related: how to choose a liquidity provider.
Questions people ask
Is B-booking legal?
Acting as counterparty to client trades is a recognised model in many jurisdictions, subject to rules on capital, disclosure and conflicts of interest. Whether and how you may do it depends on your regulator, so take legal advice.
Do A-book brokers make money when clients lose?
Not directly. An A-book broker earns from spread markup or commission on each trade, whatever the outcome for the client.
Can a broker switch a client from B-book to A-book?
Yes, in a hybrid setup. Routing rules can move a client or individual orders between books based on size, instrument or trading pattern.
This post is general information about technology and the brokerage industry. It is not financial, investment, legal or regulatory advice, and it is not an invitation to trade.