FOREX - "KITCHEN"
What is “Kitchen” and how it is technically arranged, how A-Book and B-Book work
There are only two business models of retail Forex brokers and they are divided into concepts accepted in the broker environment as A-Book and B-Book. The use of B-Book implies that the broker is a dealer for customers, executes all transactions only virtually, does not take them to the interbank market, closing them inside the virtual system. This is our “kitchen” in the traditional sense. Every time the client earns, the broker loses money, and vice versa. As we will see below, this approach strongly stimulates various cunning and gray schemes of manipulation, allowing the “kitchen” to always remain in the black. In contrast to this approach, A-Book brokers are built, where deals are sent to counterparties, and the broker earns exclusively on commission paid by the client for the services provided. Working on this business model, companies are interested exclusively in increasing the turnover and profitability of customers. The better things are at the client, the more the broker who executes A-Book transactions earns at the commission.
This ECN / STP broker works exclusively on A-Book.
It would seem that both concepts are fairly simple to understand, but the devil is in the details. For each of the two concepts is the mass of subtleties hidden from the eyes of traders. They need to understand in more detail.
Technical device B-Book broker
All systems of such a broker are created and sharpened to ensure the security of the flow of funds from the client’s account to the broker’s account. In addition to the standard MT4 terminal and Meta server, such companies use sophisticated risk management systems, where the risk for the company is represented by profitable customers. Huge resources are focused on the continuous monitoring and analysis of client transactions, as well as the use of all available means in order to maximize the costs and losses of traders, and, as a result, to ensure the company's profit. Details of gray schemes and specific methods of manipulation of such companies will be seen in the article section below.
A-Book Broker Organization
This ECN / STP broker, working with A-Book, is designed to provide the client with maximum liquidity, high execution speed, and the lowest possible costs for trading activities, since the foundation of the business concept of such companies is based on long-term cooperation with customers to ensure mutual growth, expressed in trader's profits and broker commissions. The technical device here is much more difficult to implement, since the requirements for the quality of execution are incomparably higher than those of the B-Book broker. The basis of ECN / STP broker systems is represented by a liquidity aggregator able to concentrate a large number of trading orders on all available tools for selecting the best prices available on the market and the “pass-through” transfer of these prices, as well as the possibility of executing transactions with liquidity providers at these prices directly to the client. terminal without any intervention in the execution process. We will consider all the advantages of this business model below.
How Kitchens “help” traders to part with money
In this section, we will analyze in detail the manipulations available and widely practiced by “kitchen” brokers, consider their methods and settings based on the real system used by many companies on the market today.
First I would like to touch on specific numbers. Our readers shared screenshots from one of the “kitchen” brokers with Quinsight analysts. A medium-sized company with five employees is bankrupt today, but look at profitability in one day:
As we see, the company's customers lost an aggregate of 195 thousand dollars in one day. All these losses have been successfully transformed into the profits of the company, which the next day will invest them in massive advertising to attract new sacrificial sheep ...As for the manipulations that allow to achieve such super-profits, let's consider them on the example of the same company and the risk management system that is still actively used by hundreds of brokers:
In the screenshot we see exactly those settings that allow you to manage the virtual execution of commercial transactions.
1.Sleep time - an option that sets an artificial delay in execution.
2.Guarantee stop loss - the option of ensuring guaranteed performance at the client's stop-loss. This is one of the few settings that could help the trader. As you can guess, brokers are not in a hurry to adopt this feature. As a rule, it is not active.
3.Take percentage from spread - an option that allows you to pick up all or part of the positive slippage of the trader. By the way, the FCA regulator in the UK fined FXCM in 2013 just for this practice. The amount of the fine then amounted to $ 16.9 million, which, unfortunately, does not prevent all other brokers from continuing to use this method - the profit exceeds the possible fines at times.
4.Percentage from spread as broker profit - here the guaranteed minimum profit is laid at each transaction that will be obtained by any of the available methods: spread expansion, slippage or delay in execution. When using this function, the execution of the order will not occur until the broker receives the specified profit from the transaction.
5.Don’t take broker profit if negative slippage - the function of abandoning the logic of the profit system in cases where the transaction brings slippage to the client - as well as paragraph (2), this potentially useful function for the trader is disabled.
6.Limit trader profit from positive slippage - the ability to limit the client's profit from a positive slippage. Everything is simple here, if the client receives a positive slippage, then it must be boldly limited to the “reasonable” limit on the part of the broker, or removed entirely.
7. Individual settings in the risk management system for each trading instrument - here the same guaranteed minimum profit is set for each transaction, as we saw in paragraph (4) above, but for each trading instrument individually.
And all these settings can vary from client to client. If a trader is losing money anyway, then he will most likely have better conditions than the one who can and can earn. As a result, of course, only the broker earns. And this is just one example of possible systems. We have no doubt that there are techniques and more complicated, but even what is described above is enough to break any, even the most profitable trading system. Hope to make money with a B-Book broker, alas, is not necessary.
What is also very curious: most of these actions by the broker are completely legal, including in such jurisdictions as the United Kingdom. Why this is so, we will deal a little later in the sections on the Client Agreement and legislation.
Where do such colossal advertising budgets come from "kitchen" brokers?
The business model of such a broker is built on the basis of super-profitability and depends on the constant influx of new people who want to try themselves in the field of Forex. Since up to 95% or more of the clients of such companies lose their money and sometimes not without broker participation, high profitability can be maintained only through incessant advertising activity. According to the internal budgets, which fell into our hands, 90% of the “kitchen” clients' deposits are budgeted as a profit, which immediately after receipt from the client goes into advertising expenses. Such brokers can afford to buy almost all banner-places on thematic online resources, contextual advertising, they can hire hundreds of telemarketing specialists for “live” communication with customers, and even break into print media, advertising on public transport, at airports and trains. Their ads are everywhere. So where does so much money come from?
You won't have to go far behind the numbers, but rather visit the official website of one of the largest Forex brokers in Russia, publishing the results of the company's revenue and profitability. The company has published interesting information about the amount of net profit from 1 million turnover, where it corresponds to $ 78.8 dollars per million turnover, according to published data for 2012. With $ 84.9 billion turnover a month declared, the company's net profit was $ 84.9 x 12 x 1000 x $ 78.8 = $ 80 million dollars a year! And note that this is already a net profit, after all wages have been paid, technical support costs, and most importantly, advertising. According to our information, the advertising budget of “kitchens” of medium size ranges from 3-5 million dollars per month. For more companies, this article may be many times more.
Now let's compare the profitability of the “kitchen” with the profitability of the current ECN / STP broker. The average commission per million turnover at ECN brokers is $ 30 per million (10 lots). Of these $ 30, the broker will pay $ 14 to liquidity providers on average at current market rates. Only $ 16 remains to cover all expenses - salaries, office rent, servers, software development and maintenance costs, and so on. Even at a glance it can be seen that the profitability of a real ECN broker is incomparably less than the standard “kitchen” option. That is why there are so few of them. Work on the ECN / STP model is much less profitable, it depends primarily on the success of customer-traders, high turnover and skillful management of expenses. It is for these reasons that you rarely see their advertising on the Internet. Instead, all the forums and other resources are filled with materials from not the best companies, which, unfortunately, have a much larger advertising budget, despite the far from the most favorable trading conditions.
False variety of payment systems "kitchen" brokers
The variety of payment methods and payment systems that most brokers accept is amazing. It would seem, all for the convenience of the client. And put yourself in the place of the director of the company - after all, each additional method of payment is additional contractual expenses, costs of integration and maintenance.But for the companies we are used to, these expenses do not put big obstacles, since the client’s deposit is mostly the company's net profit. Some brokers even offer to replenish the account from a mobile phone via SMS ... Everything is for the client, if only he would part with his money as soon as possible.
Why are there so many pseudo STP / ECN brokers and how to select a real one
The term ECN has long become popular in the Internet, and it is used by many companies, regardless of whether they provide a real ECN platform or not. In such conditions, it is important to be able to distinguish a fake from the truth. Kitchen brokers sometimes remind Disney Land with an abundance of color and bombast, thereby creating a gaming environment for the client, like a casino in Las Vegas. In order to understand the details from and to, let us begin with an analysis of the first signs that a broker, posing as an ECN, is not really such.
1.ECN broker will never be able to offer customers deposit bonuses. The profit of this ECN is strictly limited to a commission, and it simply cannot afford to give free money to traders.
2. An ECN broker's shoulder is always limited to the leverage that liquidity providers give it, and, as a rule, will vary between different trading instruments from 1: 5 to 1: 100. The maximum leverage from liquidity providers available to brokers is 1: 100, and since a larger figure is not available to a broker, any leverage above this value indicates that the broker is not a true ECN.
3. The number of trading instruments will be limited only by the most liquid ones, for which the ECN broker can guarantee the client the best trading conditions and access to quality liquidity, where the trader can always enter and exit the market at the best market price.
4. As a rule, you will not see in the ECN broker an abundance of contests, various articles and pictures. The website will be designed in a strict but professional manner. ECN broker does not need to attract newbies with bright colors - he is interested in more experienced traders who already know how to trade, or those who show potential and can learn - those who care about their deposit and are ready for long-term cooperation.
5. Unlike the “kitchen”, the ECN broker cannot afford wide advertising, and, rather, will concentrate the available advertising budget on strategically important directions. That is why most of the proposals advertised by ECN brightly appearing in the vast Runet are mostly fake.
6. The main payment method for an ECN broker is a bank transfer. This is how professional traders replenish and cash their funds. A small amount of other payment methods may be available to customers with a deposit of less than $ 50,000 dollars, but if you see all the payment systems “whatever pleases”, then most likely such a broker is just a trick, and just wants to get your money quickly, in any way possible.
7.ECN broker shows individual attention to each client, as compared to “kitchens”, which have hundreds of thousands of clients, for an ECN broker who is not able to advertise widely, every client is an important partner in the business.
There are few real ECN / STP brokers in the world, and for the most part they are based on ideological principles, and the leaders are represented by circles of traders and investors. Every second broker today offers so-called ECN accounts, but in order to reveal here a deception of fairly simple logic and a little common sense.
Why there are no alternatives to the present STP / ECN broker
The A-Book method, which we discussed earlier, is supported by STP execution (English Straight-Through-Processing), that is, through the withdrawal of all transactions on the interbank market. STP and A-Book is a business model based on customer service and the absence of a conflict of interest. If you delve into the past and pay attention to the origins of the word broker, then this word comes from the old English broco, or a wine dealer and intermediary.All that we ideally want from a broker is the protection of our interests and a reasonable fee for services, something that we just don’t see in the dominant “brokers” in the Forex market. In contrast to the prevailing market trends, the principle of STP implies the very neutrality that a broker must, by definition, be. That is, the broker should simply provide the client with a comfortable and efficient working environment, and not put sticks in the wheels in addition to all the difficulties that are abundant in trading on the market and without gray schemes and handicrafts. Thus, there is simply no alternative to a real STP broker operating on an efficient ECN platform. If you want to earn, then you need a reliable partner who will not fail and will not deceive. Standard kitchen solutions are not such an option.
Market Quotes and their Impact on the Efficiency of Trading Decisions
Let's talk about the price stream in the terminal. Why is it important? An experienced trader can “read” and understand the essence of the movement of market prices, delve into the dynamics of prices. Most brokers, including advertised Western companies, have no price flow in the terminal (price feed) with the market price. 99% of all brokers take a price stream from Meta Quotes or other sources and, closing transactions within their servers, simply give clients some reflection of the near-market price, some kind of average value. So much cheaper and easier in terms of infrastructure. There are two problems with this approach:
1) A person never sees a real market price, in particular, it is important in moments of volatility, when speed and accurate price are most important for making the right decision. If a trader trades from "approximate" prices, he will never receive full market information, respectively, the decisions at critical moments will be wrong. In English, brokers call such a solution “indicative feed”, that is, an approximate / average price stream. Such a solution is very cheap and easy to implement, the broker only needs to pay for the information flow, and he will be able to successfully close traders inside the so-called B-Book execution system, where orders are executed virtually and the broker takes the reverse side of each transaction. In this case, the broker only remains to wait until the client loses money. And regulation here will not help the trader, since the broker working on B-Book has the right to quote the price he considers necessary, because he is a dealer in accordance with the client agreement, and the price of such a broker is the market price. Such big brokers like Gain Capital have a lot of funds and can wait a year before “draining” a client, but sooner or later they will do it, because no one will give free money to a trader, and such a broker loses every time a trader earns. And most importantly, such a discharge will be legal, since a virtual broker such as Gain Capital is a client dealer, and the client’s market is limited to a dealer. And such a drain will occur very technically - sooner or later the trader will enter a loss, and it will be necessary to urgently go out, and the broker will expand the spread to an indecent value, or simply not let go out of the market, or use another one of hundreds of possible manipulation methods, which will also be legal - sulfur, unethical, but legal.
2) No expert / robot in MQL can be developed for profitable trading on quotes that do not reflect the real market reality. In fact, the robot will trade at random numbers, at a price that moves "around" the market, without reflecting the real market, respectively, the decisions of the robot will also be wrong and sometimes contradict the logic, as well as the input prices contradict the real market dynamics.