In our opinion, \u201cC-Book\u201d is just marketing jargon. It\u2019s not really a different approach that brokers use to manage risk, it\u2019s more of a vague term to describe variations or tweaks of A-Book and B-Book execution.<\/p>\n\n\n\n As you\u2019ll see, \u201cC-Book execution\u201d isn\u2019t really used by the broker to manage risk, but to try and make more money for itself.<\/p>\n\n\n\n These execution methods are also considered controversial and it\u2019s questionable whether forex brokers should be doing them. We\u2019ll leave it up to you to be the judge.<\/p>\n\n\n\n We will cover three forms of \u201cC-Booking\u201d:<\/p>\n\n\n\n The most common form of \u201cC-Book execution\u201d is the partial hedging of a customer\u2019s order<\/strong>.<\/p>\n\n\n\n A broker can hedge market risk in part and not in its entirety. This will reduce, but not eliminate, adverse price movements to the position being hedged.<\/p>\n\n\n\n The risk that remains unhedged, also known as residual risk<\/strong>, gives the broker the opportunity to profit<\/strong> IF the price moves in its favor.<\/p>\n\n\n\n Think of this risk management strategy as a \u201cpartial A-Book<\/strong>\u201d and \u201cpartial B-Book<\/strong>\u201d.<\/p>\n\n\n\n Basically, the broker has A-Booked a certain percentage of its risk<\/strong> and has B-Booked the rest.<\/p>\n\n\n\n Let\u2019s look at an example where a broker hedges 50% of a customer\u2019s position<\/strong>.<\/p>\n\n\n\n Elsa opens a long EUR\/USD position at 1.2001<\/strong>.<\/p>\n\n\n\n Her position size is 1,000,000 units or 10 standard lots. This means a 1-pip move equals $100.<\/p>\n\n\n\n The broker hedges 50% of the risk<\/strong> by opening a long 500,000 EUR\/USD position with an LP at 1.2000<\/strong>.<\/p>\n\n\n\n (If it had gone long the entire 1,000,000 units, this would be considered A-Book, since 100% of the position is hedged.)<\/p>\n\n\n\n EUR\/USD rises in price.<\/p>\n\n\n\n Elsa wants to take profit and exits her trade at 1.2101, resulting in a gain of 100 pips or $10,000 ($100 x 100 pips).<\/p>\n\n\n\n For the broker, this means a $10,000 loss.<\/p>\n\n\n\n If the broker had just B-Booked Elsa\u2019s trade, it would\u2019ve had to eat the entire loss<\/strong>.<\/p>\n\n\n\n But fortunately, it hedged part of Elsa\u2019s trade.<\/p>\n\n\n\n While the hedge trade resulted in a gain of 102 pips<\/strong>, since the position size was 500,000 (half of the 1,000,000), the profit was $5,100.<\/p>\n\n\n\n This profit made from the LP helped reduce some of the losses from Elsa\u2019s trade, so the net loss was $4,900<\/strong> (instead of the full $10,000).<\/p>\n\n\n\n Conversely, if the EUR\/USD fell, the profits of the broker against Elsa would be reduced by the losses incurred from hedging.<\/p>\n\n\n\n In this example, Elsa opens a long EUR\/USD position at 1.2001<\/strong>.<\/p>\n\n\n\n The broker hedges 50% of the risk by opening a long 500,000 EUR\/USD position with an LP at 1.2000.<\/p>\n\n\n\n EUR\/USD falls in price.<\/p>\n\n\n\n Elsa\u2019s stop-loss is hit and her trade is exited at 1.1951<\/strong>, resulting in a loss of 50 pips or $5,000.<\/p>\n\n\n\n For the broker, this means a $5,000 gain<\/strong>.<\/p>\n\n\n\n If the broker had just B-Booked Elsa\u2019s trade, it would\u2019ve kept all this profit<\/strong>.<\/p>\n\n\n\n But it didn\u2019t, it hedged part of Elsa\u2019s trade.<\/p>\n\n\n\n The hedge trade resulted in a loss of 48 pips. Since the position size was 500,000 (half of the 1,000,000), the loss was $2,400<\/strong>.<\/p>\n\n\n\n This loss suffered from the LP helped reduce some of the profit from Elsa\u2019s trade, so the net profit was $2,600<\/strong> (instead of the full $5,000).<\/p>\n\n\n\n So far, you\u2019ve seen how a broker can fully hedge (=100%) against a customer\u2019s position, known as A-Book<\/strong>. And you\u2019ve seen how a broker can partially hedge (>100%) against a customer\u2019s position, known as C-Book<\/strong>.<\/p>\n\n\n\n C-Booking is not limited to partial hedging<\/strong>.<\/p>\n\n\n\n Another variant of C-Booking is when a broker can also choose to \u201coverhedge\u201d<\/strong>, meaning it can hedge more than 100% of a customer\u2019s position<\/strong>.<\/p>\n\n\n\n For example, instead of a hedge trade that covers 100%, it can choose to hedge 110%<\/strong>.<\/p>\n\n\n\n Rather than \u201cC-Book\u201d, a more accurate name would probably be \u201cA-Book+<\/strong>\u201c.<\/p>\n\n\n\n Why would a broker want to do this?<\/p>\n\n\n\n If the broker thinks the customer\u2019s trade will make a profit, it can \u201cride along\u201d with the customer and make some extra profits.<\/p>\n\n\n\n Elsa opens a long 1,000,000 EUR\/USD position at 1.2001, which means the broker is now short 1,000,000 EUR\/USD.<\/p>\n\n\n\n Here, the broker can decide to:<\/p>\n\n\n\n The broker has profiled Elsa as an informed trader and chooses option #4<\/strong>.<\/p>\n\n\n\n It hedges 110% of the risk<\/strong>.<\/p>\n\n\n\n It goes long 1,100,000 EUR\/USD with an LP at 1.2000<\/strong>.<\/p>\n\n\n\n If it A-Booked the trade, it would\u2019ve gone long 1,000,000.<\/p>\n\n\n\n Instead, it went long 1,00,000 plus an additional 100,000 units or the equivalent of 110% Elsa\u2019s position size<\/strong>.<\/p>\n\n\n\n Elsa turns out right and EUR\/USD rises.<\/p>\n\n\n\n She exits her trade for a gain of 100 pips or $10,000.<\/p>\n\n\n\n Obviously, this means the broker has a loss of $10,000.<\/p>\n\n\n\n But\u2026.notice its P&L with the LP<\/strong>.<\/p>\n\n\n\n Since the broker \u201coverhedged<\/strong>\u201d and had a bigger position size against the LP, its profit from the LP exceeded its loss from Elsa.<\/p>\n\n\n\n The broker was able to \u201cjuice\u201d its profits.<\/p>\n\n\n\n This \u201coverhedging\u201d strategy is not without risks though.<\/p>\n\n\n\n Let\u2019s see what happens when the customer loses.<\/p>\n\n\n\n In this scenario, EUR\/USD falls and Elsa exits her trade at a loss of $10,000.<\/p>\n\n\n\n Obviously, this means the broker has a gain of $10,000.<\/p>\n\n\n\n But\u2026.notice its P&L with the LP.<\/p>\n\n\n\n Since the broker \u201coverhedged<\/strong>\u201d and had a bigger position size against the LP, its loss from the LP exceeded its profit from Elsa.<\/p>\n\n\n\n This is the tradeoff if the broker\u2019s hedge exceeds 100%.<\/p>\n\n\n\n It exposes itself to greater loss<\/strong> if the customer ends up wrong.<\/p>\n\n\n\n Another variant of C-Booking is when a broker \u201creverse hedges\u201d a customer\u2019s trade either partially or completely.<\/p>\n\n\n\n This practice is based on the assumption that a customer trades so poorly, it\u2019s possible to make money by not only B-Booking the position but to ADD on to the B-Booked position<\/strong>!<\/p>\n\n\n\n Rather than another variant of \u201cC-Book\u201d, a more accurate name would probably be \u201cB-Book+<\/strong>\u201c.<\/p>\n\n\n\n Basically, the broker does not even try to hedge or transfer market risk, it purposely takes on MORE market risk!<\/p>\n\n\n\n![\"C-Book](\"https:\/\/bpcdn.co\/images\/2021\/06\/08194145\/c-book-forex-broker-360x352.png\" "\\"C-Book")
<\/figure>\n\n\n\nPartial Hedge<\/h2>\n\n\n\n
![\"C-Book](\"https:\/\/bpcdn.co\/images\/2021\/04\/26140732\/c-book-example-1-a.png\" "\\"C-Book")
<\/a><\/figure>\n\n\n\n<\/a><\/figure>\n\n\n\n\u201cOverhedge\u201d<\/h2>\n\n\n\n
<\/a><\/figure>\n\n\n\n<\/a><\/figure>\n\n\n\n\u201cReverse Hedge\u201d<\/h2>\n\n\n\n