Liquidity Provider vs Market Maker: What’s the Difference?

Source: Fazzaco 2020-08-13

A Forex brokerage firm can launch its operations according to the way it plans on running its business and can be involved in the trading process or as an intermediary. Brokers who are involved in trading against their clients generate income from actual trading rather than fees. Those who act as an intermediary, charge a fee for allowing traders to access liquidity.

Forex brokerages usually operate under the business model of a Liquidity Provider or Market Maker. This article explains how each of these models work and the differences between them.

These two Forex brokerage models are referred to as A-book and B-book processing.

Liquidity Providers (A-book)

Liquidity providers, or A-book is an easier method to set up a brokerage and as the broker is just the intermediary, it allows the trader to access the interbank market by passing the orders to liquidity providers.The best bid ask spread is then transmitted to the clients.

This business model is referred to as A-book processing or Straight Through Processing (STP). In this case, the broker charges a fee and earns on the basis of volume generated by its clients.

Although it may not be as profitable as a Market Maker, this model of brokerage is more transparent and is held in higher esteem by market participants. This business model can also be very successful if the brokerage’s profits are invested carefully with a strategy that focuses on attracting as many active traders as possible and offering additional services to increase their income.

For example, some people use liquidity providers as a data feed provider for getting forex data feed (historical or live) about currency pairs for online calculators.

Market Maker Brokers (B-book)

B-book brokers take the other side of their customer’s trades and do not pass the orders to a liquidity provider. In fact, some Market Makers also earn commissions by providing liquidity themselves to their clients' firms.

This means that Forex traders who choose a B-book broker will be trading against the broker and any profits generated equate to a loss made by the Forex brokerage. The B-book model provides great opportunities for the brokerage to make a profit, hence many of them opt for this model.

Nevertheless, brokerages set up as a B-book dealer incur high costs. These include setting up trading desks and algorithmic trading which automatically take the other side of customer’s trades. These costs must be deducted from the profits.

Hybrid Model

Some brokerages are involved in both A-book and B-book processing known as a hybrid model . This can be determined by looking at the type of the trading conditions they offer.

Brokerages who operate using this model usually categorize traders into two groups, commonly based on factors like size of the trading account and how long they have been trading in the Forex market, for example.

Hence, the brokerage offsets a percentage of the trade into the real market (A-book) and warehouses the rest of the trade (B-book).

Generally speaking, both Liquidity Provider and Market Maker models perform more or less the same functions. When deciding what business model to choose, brokerages should consider the operational and regulatory aspects of each and decide which model provides better long-term profit-potential.

(source:liquidity-provider)

Liquidity

Market Maker

Liquidity Providers

Liquidity Provider vs Market Maker: What’s the Difference?

Subscribe to Our Newsletter!

Subscribe to Our Newsletter!