B-Book CFD trading: Is your broker winning when you lose?

Posted: 8 November 2021 4:52 pm
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Are you unknowingly giving your broker billions?

CFD investors might be surprised to know that their brokers could be betting against the trades they're making, according to an industry expert.

In some instances, it's even in the broker's best interest for the investor to lose.

Investors largely focus on their own individual strategy, their personal finances for the position and what they are going to end up making through CFD trading.

As such, most traders tend to miss the mechanics behind the trade itself.

Global Prime's director and co-founder Jeremy Kinstlinger points to the problems associated with the misalignment of clients and brokers, with clients ultimately losing from these trades.

"Now on the B-Book, what they do is they internalise the trade," Kinstlinger said.

"So it doesn't go out to market. What that means is if the client loses money, then the broker makes that as a profit."

"And if most retail clients lose money, they put as many losers into the B-Book as they can, and based on that, they are profiting to the tune of billions of dollars a year off the losses of their clients," he said.

What is a B-Book?

Let's take this back a step.

Investors will be placed on either the A- or B-Book.

The A-Book model is when the broker sends your trade directly to the market, meaning it is up to a third party to execute the trade.

Under the B-Book model, the broker processes their clients' orders in-house and acts as a market maker.

In this situation, the broker acts as a counterparty to the client, meaning they bet against the client.

According to Kinstlinger, most operators in Australia operate under an A- and B-Book model.

"They separate losing clients into a B-Book and the winning clients into an A-Book".

"What that means is when a winning trader makes a trade, that goes into the real market and the broker has hedged the risk out.

"On the B-Book, they internalise the trade, so if the client loses money, the broker makes it as a profit," Kinstlinger told Finder.

Potential risks for investors?

While highlighting this only happens in the worst-case scenario for investors, Kinstlinger points out a situation where a broker could encourage an investor to continue losing money.

"If you're running a B-Book, questions run through your mind."

"The most nefarious, and I'm talking about the real evil chop shops, they will call up clients, get them to deposit money, give them bad advice to blow up their accounts and profit off their losses," he explains to Finder.

Kinstlinger highlights that, in the worst-case scenario, investors are going broke due to these conversations.

Going further, Kinstlinger explains even if a B-Book broker isn't actively encouraging consumers to lose, they do not align with the investors' interest.

"Why would you be incentivised to give your client access to features, innovate or even help them to win when you're running a B-Book", Kinstlinger asked.

ASIC seeks to lift education

When asked about B-Books, ASIC explained it is important investors understand the risks they are taking prior to signing up for CFD products.

"Our focus is more toward updating/educating retail investors toward the statistics and reducing the possible harms by looking at limiting leverage and the types of products allowed," an ASIC spokesperson said.

As such, ASIC explains the various risk associated with these products:

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