Quick answer
The usual explanation is simple. An A-book
broker hedges a client trade with a liquidity provider, while a B-book broker
keeps the exposure and may benefit if the client loses.
That explanation is useful as a starting
point, but it is not how most established CFD brokers manage risk in practice.
A CFD broker remains the client’s contractual counterparty. Separately, the
broker may offset opposing client positions, hedge some or all of its net
exposure externally, or retain a limited amount of risk within defined
controls.
In practice, many established CFD brokers
use some form of hybrid or portfolio-level risk management. They manage the
combined exposure created by thousands of trades rather than mechanically
sending every individual order to a liquidity provider or simply betting
against every client.
Base Markets is a useful example. It
manages exposure primarily at aggregate portfolio level, considering exposure
across its client book, internally offsetting opposing positions, and managing
the residual through external hedging and controlled risk retention. Base’s
decision to offset, hedge, or retain the resulting exposure does not, in
itself, change the pricing and execution terms applicable to the client’s
account.
That distinction matters. The more useful
questions are not whether a broker uses a fashionable label, but whether its
pricing is clear, its execution is fair, its risk is controlled, and it can
meet withdrawals when clients are profitable.
What this guide covers
This guide explains:
- what the industry usually means by
A-book and B-book - what legally and operationally
happens when a CFD trade is opened - how internalisation, netting, and
external hedging work together - where genuine conflicts of
interest can arise - what traders should ask a broker
before depositing - how Base Markets applies these
principles in practice
A-book and B-book: the
conventional explanation
In retail trading, A-book and B-book are
informal industry terms. They are not precise legal classifications, and
different brokers sometimes use them differently.
What is usually meant
by A-book?
An A-book model is commonly described as
straight-through processing, or STP. The broker receives a client order and
creates an equivalent hedge with a bank, prime broker, non-bank market maker,
or another liquidity provider.
If a client buys 10 lots of EUR/USD, the
broker buys 10 lots externally. The client’s profit or loss is substantially
offset by the external hedge, leaving the broker to earn from commission,
spread markup, financing, or other disclosed charges.
This is often marketed as if the client’s
trade itself has been passed into the market. With an over-the-counter CFD,
that description is incomplete. The client’s contract remains with the broker.
The external transaction is the broker’s own hedge of the exposure created by
that contract.
What is usually meant
by B-book?
A B-book model is commonly described as the
broker retaining the risk. If the client buys 10 lots, the broker does not
necessarily create an equivalent external hedge. The broker remains
economically exposed to the client’s result.
If the client loses, retained client
trading losses may benefit the broker. If the client wins, the broker must pay
the profit from its own resources. This creates a potential conflict, but it
does not by itself prove that the client received an unfair price or execution.
The simple comparison
What actually happens when you trade a CFD?
When a client buys a CFD, the broker is the
contractual counterparty to that CFD. The client is not normally acquiring the
underlying currency, index, commodity, or share from the external market. The
broker calculates the client’s profit or loss by reference to the relevant
market price and settles the CFD under its terms.
The trade creates market exposure for the
broker. The broker then decides how to manage that exposure. It may:
- offset it against a client
position in the opposite direction - hedge it with one or more external
liquidity providers - retain it temporarily or
permanently within an approved risk limit - use a combination of all three
These are risk-management decisions made
behind the client contract. They should not determine whether the client
receives fair pricing, appropriate execution, or access to valid profits.
This is why statements such as “your
order is sent directly to the market” should be read carefully. They may
describe the broker’s hedging process, but they do not alter the legal
structure of an OTC CFD. ECN, STP, agency, A-book, and B-book can be useful
shorthand, but none of them replaces a clear explanation of who the
counterparty is and how the broker manages exposure.
One client, two
clients, and thousands of clients
The mechanics become clearer when viewed at
portfolio level.
One client buys 100
lots
Assume one client buys 100 lots of EUR/USD and
there are no other relevant positions. A broker that does not want the
directional risk can buy 100 lots from a liquidity provider.
Suppose, purely for illustration, the
client pays USD 7 per lot round turn and the external hedge costs the broker
USD 5 per lot. The broker’s gross difference is USD 2 per lot before
technology, staffing, regulation, payments, bad debt, financing, and other
operating costs.
The important commercial point is that a
durable broker does not need the client to lose. It can earn a fair amount from
repeated trading activity. A profitable client who continues trading for years
can be more valuable than a client who loses a USD 500 balance once and leaves.
For Base, the better commercial outcome is
to earn a fair amount from a client who trades for years, rather than make a
larger one-off gain when that client loses everything and leaves.
Base applies that principle through
transparent pricing. On FX, Base Zero charges USD 2 per side, or USD 4 round
turn per standard lot. The commercial objective is recurring, clearly disclosed
trading revenue and a long-term relationship, not dependence on an individual
client’s loss.
One client buys 100
lots and another sells 100 lots
Now assume one client is long 100 lots and
another is short 100 lots in the same instrument. Their positions create no net
directional exposure for the broker at that moment.
If the market rises, the broker owes the
long client and receives the corresponding loss from the short client. If the
market falls, the economic result reverses. The broker effectively administers
the two contracts and charges each client the disclosed trading costs.
Hedging both positions separately would
create external commission, spread, financing, and margin costs without
reducing the broker’s net market risk. Internally offsetting them is therefore
not automatically a trick or a bet against either trader. It is a rational way
to manage a portfolio.
This process is usually called
internalisation or netting. It can improve the broker’s economics and reduce
unnecessary dependence on external liquidity. It can also provide additional
capacity because the broker does not need to send two offsetting positions into
the market simply to cancel them out.
Thousands of clients
trade continuously
Real broker books are far more dynamic.
Thousands of clients open, close, increase, reduce, and reverse positions
across many instruments and time horizons. Some exposures offset immediately.
Others remain unmatched for seconds, hours, or longer.
Imagine clients are collectively long
1,000 lots and short 1,000.01 lots. The broker’s net exposure is only 0.01
lots. It may decide that this difference is too small to hedge efficiently, is
within its risk tolerance, or is likely to be offset by the next incoming
order.
Now imagine the book is long 1,000 lots
and short 900 lots. The broker has a net long exposure of 100 lots. It can
hedge all of that residual, hedge part of it, or retain it within approved
limits. The decision may depend on volatility, liquidity, concentration, event
risk, available LP credit, and the broker’s capital.
This portfolio approach explains why a
broker’s headline hedging percentage can be misleading. In the 1,000-lot long
and 900-lot short example, hedging 100 lots represents only 5.3% of the 1,900
lots of gross positions, but it represents 100% of the broker’s net directional
exposure. The denominator matters.
It also explains why asking whether a
particular trade was A-booked or B-booked may produce a false sense of
certainty. An individual client position can be internally offset today, part
of an external portfolio hedge a moment later, and offset again as the book
changes.
How CFD brokers make
money
A broker can earn revenue from several
sources, including:
- commission charged per lot or as a
percentage of value - a disclosed markup within the
spread - overnight financing charges
- urrency conversion and other
clearly stated fees - the net result of market exposure
retained by the broker
The first four sources can support a
straightforward, repeatable business. A broker provides access, technology,
execution, risk infrastructure, payments, and service in exchange for
transparent charges.
Retained exposure is different because its
result varies with client performance and the market. It can produce gains or
losses for the broker. A properly managed firm treats that as a controlled
portfolio risk, not as permission to interfere with a client trade.
Why internalisation is not automatically bad
Internalisation is sometimes presented as
evidence that the broker is trading against its clients. That is too
simplistic.
The broker is already the contractual
counterparty to the CFD. Whether it hedges the resulting exposure is a separate
treasury and risk decision. If opposing client positions naturally offset,
avoiding two unnecessary external hedges can reduce transaction costs, LP
margin requirements, and operational friction.
It can also make more liquidity available
to clients than the broker could obtain from a single external venue at a
particular moment. The broker can combine internal flow with multiple liquidity
providers and use its own risk capacity to support execution.
The client should care about the outcome:
Was the price derived fairly? Was the order handled consistently? Was any
slippage genuine and applied according to disclosed rules? Can the broker meet
the resulting obligation if the client wins?
Internalisation becomes a problem when the
broker’s economic interest in a client loss begins to influence those answers.
Where the conflict
becomes unacceptable
A retained-risk model creates a potential
conflict because the broker may benefit economically when clients lose.
Potential conflicts exist in many financial businesses. The test is how they
are controlled.
The line is crossed when a broker uses its
control over the trading environment to manufacture or increase client losses.
Warning signs can include:
- unjustified or consistently
asymmetric slippage - prices that depart materially from
credible market references without explanation - arbitrary spread widening
unrelated to market conditions - selective delays or rejection of
profitable orders - cancellation of legitimate
profitable trades after the event - withdrawal obstruction or pressure
to keep funds in the account - different execution treatment
based on whether the client is winning
These are not theoretical concerns. Regulators
have pursued CFD businesses for systemic unconscionable conduct involving
manipulation of client trades and obstruction of withdrawals. One documented
example is the Australian
Securities and Investments Commission’s 2024 Federal Court case.
The lesson is not that every broker
retaining exposure behaves improperly. It is that execution controls, financial
strength, governance, and withdrawal conduct matter more than a marketing
label.
Why the broker’s
capital matters
External hedging requires capital. A broker
may offer a client 500:1 leverage while receiving only 100:1 from its liquidity
provider.
For a simplified USD 100,000 position, the
client may post USD 200 of margin at 500:1. To create the same external hedge
at 100:1, the broker may need to post USD 1,000 with its LP. That is five times
the client’s margin. The USD 1,000 is collateral committed while the hedge
remains open, rather than a trading cost, and is normally released when the
hedge is closed. At 100 lots, the simplified requirement becomes USD 20,000
from clients against USD 100,000 at the LP.
Actual requirements vary by asset,
counterparty, concentration, volatility, and credit arrangement, but the
principle is important. A broker can promise high leverage more easily than it
can fund a large hedging programme.
Retaining exposure also requires financial
strength. If clients are profitable in aggregate, the broker must pay them.
Sharp events such as the removal of the Swiss franc floor in 2015 can create
concentrated gains and losses quickly. A weak broker may respond by delaying
withdrawals, disputing legitimate trades, asking clients not to withdraw, or
failing altogether.
Base Markets is majority-owned by an
investment fund. That financial backing matters because external hedging
requires properly funded LP accounts, while retained exposure requires the
broker to have sufficient liquidity to meet profitable client positions and
withdrawals.
Financial backing is not a substitute for
risk controls, and regulation is the starting point rather than the entire
story. It does, however, help distinguish a broker built to operate through
difficult markets from one dependent on the next wave of client deposits.
Can you identify an
A-book or B-book broker from the platform?
Not reliably.
Variable spreads, commission-based
accounts, positive or negative slippage, re-quotes, fast execution, and MT5
Depth of Market do not prove whether the broker hedged the resulting exposure
externally. Those features may say something about pricing or execution, but
they do not reveal the broker’s complete risk book.
A “raw” account does not prove
agency execution. A fixed spread does not prove B-booking. A liquidity-provider
logo does not show which exposures are hedged, when they are hedged, or in what
amount. Even a broker that hedges extensively may aggregate transactions rather
than replicate each client order one for one.
The better approach is simpler: ask the
broker.
Traders should not need to conduct
forensic analysis on an MT5 account to understand a broker’s business model.
They should be able to ask the broker and receive a straight answer.
Useful questions include:
- Are you the contractual
counterparty to my CFD? - Do you manage exposure at
individual trade or aggregate portfolio level? - Do opposing client positions
offset internally? - How do you manage residual
exposure and concentration risk? - Does execution or pricing change
according to how my exposure is managed? - What are the total trading costs,
including commission, spread, financing, and conversion? - How are client funds held, and
what is the normal withdrawal process? - Who owns and finances the
brokerage?
A credible broker may not publish its
liquidity counterparties, hedge thresholds, or real-time exposure. Those can be
commercially sensitive risk-management details. It should still be able to
explain its model clearly, identify its regulator and legal entity, publish its
charges, and describe how it handles execution and withdrawals.
Separately agreed institutional hedging
arrangements may be considered where legally, operationally, and commercially
appropriate, subject to liquidity, margin, volume, and reporting requirements.
How Base Markets
applies the model
Base Markets is regulated
by the Financial Services Commission of Mauritius under licence number
GB25204723.
Base’s approach can be summarised plainly:
- Base is the contractual
counterparty to client CFDs. - Opposing client positions may be
internally offset at aggregate level. - Residual exposure is externally
hedged or retained within defined risk limits. - Base’s decision to offset, hedge,
or retain the resulting exposure does not, in itself, change the pricing and
execution terms applicable to the client’s account. - Base manages exposure primarily at
aggregate portfolio level and does not alter a client’s applicable pricing or
execution solely because the client is profitable or because the resulting
exposure is hedged or retained. - The preferred commercial model is
transparent trading revenue from clients who continue to trade.
This is consistent with the broader Base
proposition. The firm competes on clear total pricing, credible liquidity,
execution oversight, straightforward funding and withdrawals, and access to
people who understand the trading environment.
It does not claim that trading is easy or
that clients will necessarily be profitable. CFDs are high-risk products and
most retail traders lose money. The point is narrower and more important: a
broker does not need to design its business around making an individual client
fail.
Four common myths
Myth 1: A-book means there is no conflict
An external hedge can reduce market risk, but
the broker still controls pricing, execution rules, margin, and the client
relationship. A label does not guarantee good conduct.
Myth 2: B-book means
the broker is manipulating trades
Retaining exposure creates a potential
conflict, not proof of abuse. Fair pricing, consistent execution, adequate
capital, and reliable withdrawals remain the proper tests.
Myth 3: Raw spreads or
MT5 Depth of Market prove A-book execution
They do not. They show elements of the client
trading environment, not the broker’s complete aggregate exposure or external
hedge activity.
Myth 4: A low hedge
percentage means most client trades are being bet against
Not necessarily. Gross client positions may
offset substantially. A small hedge as a percentage of gross volume can cover
all of the remaining net directional risk.
Frequently asked
questions
Is A-book always safer
than B-book?
No. The label alone does not establish
financial strength, execution quality, governance, or withdrawal reliability. A
poorly capitalised A-book broker can still fail, while a well-capitalised
hybrid broker can manage risk responsibly.
Does a broker profit
when I lose?
It may benefit from losses on exposure it
retains, but it may also lose when retained clients win. Many brokers earn
primarily from spreads, commission, financing, and other fees while managing
aggregate market exposure separately.
Does internalisation
affect my price?
It should not result in unfair treatment.
Base’s decision to offset, hedge, or retain the resulting exposure does not, in
itself, change the pricing and execution terms applicable to the client’s
account.
Can I see whether my
exact trade was hedged?
Usually not from a retail platform. Hedging
may occur at aggregate portfolio level and may change as other clients trade.
Ask the broker how its overall process works.
Why would a broker
retain any exposure?
Tiny residual positions may be uneconomic to
hedge, offsetting flow may arrive quickly, and limited exposure may fall within
an approved risk appetite. The issue is whether the risk is controlled and
adequately funded.
What should make me
cautious?
Unclear total costs, unexplained execution
differences, withdrawal pressure, evasive answers about the legal entity or
regulator, and extravagant promises unsupported by the actual trading product
should all prompt further investigation.
Conclusion: judge the
broker, not the label
A-book and B-book are convenient shorthand,
but they often obscure more than they reveal. A CFD broker remains the client’s
counterparty. Behind that contract, the broker can offset client flow, hedge
externally, retain controlled exposure, or combine all three.
The real dividing line is not between a
pure A-book and a pure B-book. It is between brokers that manage exposure
professionally and treat clients fairly, and brokers that use opaque pricing,
weak capital, or withdrawal obstruction to protect themselves.
Base Markets offers a direct version of
the hybrid model: aggregate the book, offset opposing flow, manage the
residual, keep risk-management decisions separate from the pricing and
execution terms applicable to each client’s account, and earn transparent
revenue from long-term trading activity.
For traders, the practical test is equally
direct. Understand what you pay. Assess the execution you receive. Ask how the
broker manages risk. Check who regulates, owns, and finances it. Then judge
whether it behaves like a business built to be there when markets, and clients,
are profitable.
Risk warning: Trading CFDs carries a
high level of risk to capital and may not be suitable for all investors. Trade
only with money you can afford to lose, ensure you understand the risks, and
seek independent advice where necessary.
This article was written by IL Contributors at investinglive.com.