The two things a broker can do with an order
When a client buys, the broker can either pass the trade on to a liquidity provider, a bank or a larger dealer, so that the broker is flat and earns only a markup or commission, or it can take the other side itself, so that the client's loss is the broker's gain and the client's gain is the broker's loss. The first is called A-booking or hedging, the second B-booking or internalising. Every retail broker does one, the other or both, and the mix is the most important thing about its business.
The labels
- Market maker or dealing desk: the broker quotes its own prices and is the counterparty to client trades, hedging its overall exposure as it chooses. Most large listed brokers are market makers in this sense and describe managing risk at the portfolio level.
- STP, straight-through processing: the broker passes client orders to one or more liquidity providers and earns a markup on the price or a commission. The client's counterparty is still the broker; the broker's counterparty is the provider.
- ECN, electronic communication network: orders go into a pool where they can match against other participants' orders as well as providers' quotes, and the broker charges a commission. True ECNs exist mainly in the institutional market; the retail label usually means an STP account with a raw spread and a commission.
- No dealing desk: a marketing term for STP or ECN routing, made notorious when the largest US broker using it was found in 2017 to have a market maker affiliate on the other side of its clients' trades.
What brokers actually do
The industry's open secret is that most brokers run a hybrid. Client flow is sorted by how profitable it is likely to be: clients who trade in ways that tend to win, or in large size, are hedged with liquidity providers, and the rest are internalised because on average they lose. The trade press has estimated for years that a majority of retail flow is B-booked. There is nothing illegal about this where it is disclosed, and regulators in Europe and Australia require a broker to say in its terms that it may be the counterparty, but it is why the label on the website is not the model.
Why it matters to the trader
A broker that is the counterparty has an interest in the client losing, and that interest can express itself in execution settings: asymmetric slippage, requotes on winning exits, spreads that widen at the worst moments. It need not, and many market makers execute fairly because their business depends on clients staying, but the incentive exists. A broker that hedges everything has no such interest and earns only from volume, but it may fill worse in thin markets because it can only offer what its providers quote.
The practical test is not the label but the record: whether the broker publishes execution statistics, what the trader's own statement shows about slippage and requotes, and what the broker's regulator requires of it. The execution quality paper in the research section goes further into the published data, and the site records for each broker which model it claims and whether it publishes statistics to support it.
Educational content is general information and does not consider your objectives, financial situation or needs. Forex and CFD trading involves significant risk.