Liquidity Provider vs. Market Maker

Liquidity Provider vs. Market Maker

Market makers and liquidity providers are the most common types of foreign exchange brokerage businesses. The next sections explain how each model works, as well as its advantages and disadvantages.

A-book processing and B-book processing are the two different types of foreign exchange brokerage models.

Brokers Who Act as Market Makers (B-book)

B-book brokers, rather than transferring their clients’ transactions to a liquidity provider, handle the opposite side of their customers’ transactions. Many Market Makers make money from their customers’ businesses merely by supplying them with financial resources, and it is true that many of them make profit from their clients’ businesses.

Trades against the broker mean that profits gained by traders are offset by losses sustained by their broker. Many Forex brokers like this technique because of the high-profit margins it offers.

Despite this, B-book dealers face hefty charges when they set up a brokerage. Taking the opposite side of consumer transactions may be automatically accomplished via the use of trading desks and algorithmic trading, for example. These costs must be taken out of the profits.

Liquidity Providers (A-book)

Liquidity providers, or A-books, are a better choice than a typical brokerage company because they are easier to use. The broker helps traders get into the interbank market by sending orders to liquidity providers.

The bid-ask spread with the narrowest bid-ask spread is the one that is selected and conveyed to consumers. In A-book or Straight Through Processing (STP), a broker makes money based on how much business its customers do for them.

While this kind of brokerage is less lucrative than Market Making, it is more transparent and so commands a greater level of respect from market players. However, if brokerage revenues are prudently invested and a good strategy is in place that prioritizes hiring as many active traders as possible while also giving them other services to supplement their income, the business model may also be extremely successful. For example, some people use liquidity providers to get forex data feeds (historical or live) about currency pairs for online calculators by getting them from a data feed provider.

Certain brokerage companies use a hybrid strategy, processing both A-book and B-book transactions concurrently. This may be established by examining the trade terms they provide to their consumers. Brokers that utilize this strategy will split traders into two groups based on a variety of characteristics, including the size of the trading account and the length of time the trader has been participating in forex trading. Therefore, brokerages put some of a transaction into the real market (A-book) and keep the rest of the deal (B-book).

As a result, brokerage firms should carefully consider the operational and regulatory implications of each business model in order to determine which one offers the highest long-term profit potential.