{"id":9485,"date":"2022-10-12T06:52:15","date_gmt":"2022-10-12T06:52:15","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=9485"},"modified":"2022-10-12T06:52:15","modified_gmt":"2022-10-12T06:52:15","slug":"b-book-how-forex-brokers-manage-their-risk","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/12\/b-book-how-forex-brokers-manage-their-risk\/","title":{"rendered":"B-Book: How Forex Brokers Manage Their Risk"},"content":{"rendered":"\n<p>When the retail forex broker takes the opposite of a customer\u2019s trade, it can choose to&nbsp;<strong>ACCEPT the market risk or TRANSFER it to another market participant<\/strong>.<\/p>\n\n\n\n<p>If a broker chooses to accept the market risk, when the trade is executed, it is called \u201c<strong>B-Book execution<\/strong>\u201d.<\/p>\n\n\n\n<p>\u201cB-Book execution\u201d is just a fancy phrase for&nbsp;<strong>taking the opposite of your trade<\/strong>.<\/p>\n\n\n\n<p>Your trade can also be described as being \u201c<strong>B-Booked<\/strong>\u201d.<\/p>\n\n\n\n<p>And since the broker has taken on risk, here are other examples of industry jargon:<\/p>\n\n\n\n<ul><li>The risk has been \u201c<strong>internalized<\/strong>\u201d.<\/li><li>The risk has been \u201c<strong>warehoused<\/strong>\u201d.<\/li><\/ul>\n\n\n\n<p>Because the broker has decided to \u201chold\u201d the risk, it has kept the risk for itself (\u201cinternalized\u201d) and stored the risk (\u201cwarehoused\u201d).<\/p>\n\n\n\n<p>Not sure if market risk appreciates being objectified. ?<\/p>\n\n\n\n<p>Depending on whether the market moves for or against the broker,&nbsp;<strong>accepting market risk can either be good OR bad for the broker<\/strong>.<\/p>\n\n\n\n<p>Let\u2019s look at an example of each.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">B-Book Order Execution Example #1: Broker Wins<\/h2>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2021\/06\/01211611\/b-book-example-broker-wins.png\" alt=\"B-Book Forex Broker Wins\" class=\"wp-image-203934\" title=\"B-Book Forex Broker Wins\"\/><\/figure>\n\n\n\n<p>In the example above, Elsa went long 100,000 EUR\/USD at 1.1500. Her broker \u201cB-Booked\u201d (took the opposite of) the trade and is short 100,000 EUR\/USD.<\/p>\n\n\n\n<p>EUR\/USD falls to&nbsp;<strong>1.1400<\/strong>.<\/p>\n\n\n\n<p>Elsa can\u2019t take the pain any longer and closes her position by selling 100,000 EUR\/USD at 1.14000.<\/p>\n\n\n\n<p>She ends up with a&nbsp;<strong>$1,000 loss<\/strong><\/p>\n\n\n\n<pre class=\"wp-block-preformatted\">P&amp;L = (Exit Price - Entry Price) x Position Size\n-1,000 = ((1.1400 - 1.1500) x 100,000)<\/pre>\n\n\n\n<p>On the other hand, the broker ends up with a&nbsp;<strong>$1,000 profit<\/strong>.<\/p>\n\n\n\n<pre class=\"wp-block-preformatted\">P&amp;L = (Entry Price - Exit Price) x Position Size\n1,000 = ((1.1500 - 1.1400) x 100,000)<\/pre>\n\n\n\n<p>In this scenario, for accepting the market risk, the broker was rewarded with a&nbsp;<strong>PROFIT<\/strong>.<\/p>\n\n\n\n<p>It was a positive outcome.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">B-Book Order Execution Example #2: Broker Loses<\/h2>\n\n\n\n<p>Let\u2019s now take a look at what happens when the&nbsp;<strong>market moves AGAINST the broker<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/bpcdn.co\/images\/2021\/06\/01211638\/b-book-example-broker-loses.png\" alt=\"B-Book Forex Broker Loses\" class=\"wp-image-203935\" title=\"B-Book Forex Broker Loses\"\/><\/figure>\n\n\n\n<p>In the example above, Elsa went long 100,000 EUR\/USD at 1.1500. Her broker \u201cB-Booked\u201d (took the opposite of) the trade and is short 100,000 EUR\/USD.<\/p>\n\n\n\n<p>EUR\/USD rises 200 pips to 1.1700.<\/p>\n\n\n\n<p>Elsa decides to take profit and closes her position by selling 100,000 EUR\/USD at 1.17000.<\/p>\n\n\n\n<p>She ends up with a&nbsp;<strong>$2,000 profit<\/strong><\/p>\n\n\n\n<pre class=\"wp-block-preformatted\">P&amp;L = (Exit Price - Entry Price) x Position Size\n2,000 = ((1.1700 - 1.1500) x 100,000)<\/pre>\n\n\n\n<p>On the other hand, the broker ends up with a&nbsp;<strong>$2,000 loss<\/strong>.<\/p>\n\n\n\n<pre class=\"wp-block-preformatted\">P&amp;L = (Entry Price - Exit Price) x Position Size\n-2,000 = ((1.1500 - 1.1700) x 100,000)<\/pre>\n\n\n\n<p>In this scenario, for accepting the market risk, the broker suffered a&nbsp;<strong>LOSS<\/strong>.<\/p>\n\n\n\n<p>It was a negative outcome.<\/p>\n\n\n\n<p>Here\u2019s a summary of how a B-Book broker benefits depending on the outcome of a trade:<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-regular\"><table><tbody><tr><td><strong>Customer\u2019s Trade<\/strong><\/td><td><strong>Broker\u2019s Order Execution<\/strong><\/td><td><strong>Benefit<\/strong><\/td><\/tr><tr><td>Win<\/td><td>B-Book&nbsp; (Accept risk)<\/td><td>Customer\u2019s gain is broker\u2019s loss<\/td><\/tr><tr><td>Lose<\/td><td>B-Book&nbsp; (Accept risk)<\/td><td>Customer\u2019s loss is broker\u2019s gain<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Potential Conflict of Interest<\/h2>\n\n\n\n<p>There is a lot of controversy with B-Book execution.<\/p>\n\n\n\n<p>Since your broker makes money if you lose money, there exists a potential conflict of interest.<\/p>\n\n\n\n<p>It creates the potential for the broker to do \u201cbad\u201d things to increase the chances that your trades lose.<\/p>\n\n\n\n<p>This causes traders to be concerned about shady behavior from brokers who don\u2019t want their customers winning.<\/p>\n\n\n\n<p>We won\u2019t go into examples of broker shadiness just yet since the focus of this lesson is&nbsp;<strong>how forex brokers manage their market risk<\/strong>&nbsp;(not how shady brokers take advantage of their customers).<\/p>\n\n\n\n<p>For now, just know that when a forex broker chooses to&nbsp;<strong>accept market risk<\/strong>&nbsp;(\u201cB-Book execution\u201d), a major downside to doing this is that a potential conflict of interest does exist between a broker and its customers.<\/p>\n\n\n\n<p>In the next lesson, we\u2019ll learn another way that a broker manages market risk:&nbsp;<strong>by&nbsp;<em>transferring<\/em>&nbsp;it<\/strong>&nbsp;(or \u201cA-Book execution\u201d).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>When the retail forex broker takes the opposite of a customer\u2019s trade, it can choose to&nbsp;ACCEPT the market risk or TRANSFER it to another market participant. If a broker chooses to accept the market risk, when the trade is executed, it is called \u201cB-Book execution\u201d. \u201cB-Book execution\u201d is just a fancy phrase for&nbsp;taking the opposite [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[768],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9485"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=9485"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9485\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=9485"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=9485"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=9485"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}