How do Forex brokers work? STP vs. ECN + A-Book, B-Book, and C-Book Brokers

Forex brokers act as financial intermediaries, granting retail traders access to the global foreign exchange market.

These companies offer trading platforms, real-time currency pair quotes, analytical tools, and execution features, serving as a bridge between traders and the market.

How Forex Brokers Work?

Forex brokers connect traders to the global currency market by receiving live quotes from liquidity providers or the interbank market and delivering them through trading platforms.

Order execution is handled either via direct models (STP/ECN), where trades are sent to the real market, or through market maker models, where the broker becomes the counterparty to the trade.

Forex brokers earn revenue through spread, commission, and swap fees, while also offering services such as diverse account types, analytical tools, and risk management.

Key criteria to evaluate how Forex brokers work include liquidity management, pricing transparency, and adherence to regulatory compliance.

Types of Forex Brokers and Operating Models

The operational models of Forex brokers depend on how they manage client orders and connect to the market. Generally, there are three main models:

• Market Maker/Dealing Desk (DD)
• No Dealing Desk (NDD) including ECN (Electronic Communication Network) and STP (Straight Through Processing)
• Hybrid Broker

Market Makers/Dealing Desk (DD)

Market Maker brokers directly act as the counterparty to the trader’s order. In other words, when a trader buys a currency pair, the broker sells it, and vice versa. This model involves the following:

• Trades are not sent to the interbank market and are instead executed internally;
• Prices are aggregated from various sources and shown to the trader with either fixed or variable spreads;
• The broker’s profit comes from the spread or, in some cases, from the trader’s losses.

This model enables brokers with internal liquidity or large client volumes to execute orders swiftly; however, it may also create a conflict of interest, as the broker profits from client losses.

No Dealing Desk Brokers (NDD)

NDD brokers act as transparent intermediaries, transmitting orders directly to the market or liquidity providers without taking the opposite side of the trade.

This model is divided into two main subtypes:

STP (Straight Through Processing)

Orders are sent directly to a pool of liquidity providers such as banks and financial institutions:

• Broker revenue is earned via spreads or fixed commissions;
• There’s no manual intervention in execution, reducing the risk of slippage or delays.

ECN (Electronic Communication Network)

Traders are connected to an electronic network of banks, institutions, and other traders:

• Spreads are typically very tight or near zero;
• Brokers charge a separate commission per trade for this access;
• Full transparency, competitive pricing, and market depth are key benefits.

STP and ECN models are perfect for professional traders because they eliminate conflicts of interest, enable fast execution, and provide real market access.

Hybrid Brokers

In this structure, how Forex brokers work involves a combination of Market Maker and STP/ECN models. Some orders are processed internally (B-Book) while others are passed to the real market or liquidity providers (A-Book). Most modern brokers operate under this hybrid model.

Understanding A-Book, B-Book, and C-Book Models

The classification into A-Book and B-Book depends on how client orders are handled:

A-Book Broker (Agency Model)

Orders are transmitted directly to liquidity providers or the interbank market, with the broker acting merely as an intermediary. The broker's profit is independent of the trader’s gain or loss.

B-Book Broker (Dealing Desk Model)

Orders are processed internally and are not routed to the real market. The broker becomes the counterparty, meaning trader losses equal broker profits, and vice versa.

While riskier, this model can be highly profitable for brokers with proper risk management.

C-Book Broker (Client Book or Customized Book)

C-Book is not officially recognized in global Forex regulations but appears in some industry literature.

It typically refers to a broker’s internal management of a specific group of clients, where all trades are settled internally with no market exposure.

Regulatory bodies like the FCA or ASIC do not acknowledge the term C-Book in their frameworks.

Order Execution Methods by Forex Brokers

Order execution in forex brokers depends on their operational model, and the quality of execution is influenced by factors such as speed, slippage, and the likelihood of order rejection.
Types of Order Execution Models in Brokers:

• Dealing Desk/Market Maker: Orders are processed internally with the broker as counterparty. Pricing is broker-defined and may involve a conflict of interest;
• No Dealing Desk - STP/ECN: Orders are routed directly to the market or liquidity providers. In STP, the broker selects from the best available prices. In ECN, orders are matched within a network of market participants.

Role of Liquidity Providers in How Forex Brokers Work

Liquidity providers (LPs) are institutions that offer bid and ask prices for currency pairs and enhance the performance of forex brokers by executing orders instantly.
The Role of Liquidity Providers (LPs) in Brokers:

• Competitive pricing
• Increased market depth
• Faster execution
• Tighter spreads
• Risk management for brokers

Types of Trading Accounts Offered by Forex Brokers

Forex brokers offer multiple account types to cater to various trader profiles:

• Standard Account: Common account with fixed or variable spreads, suited for intermediate to professional traders;
• ECN Account: Direct access to interbank markets, tight spreads, and per-trade commission;
• STP Account: Direct order routing to liquidity providers, often with variable spreads and no commission;
• Micro/Cent Account: Smaller lot sizes for risk control or practice with limited capital;
• Islamic (Swap-Free) Account: Interest-free accounts aligned with Islamic laws;
• VIP/Professional Account: Lower spreads, minimal commissions, and premium services for high-volume traders.

Forex Broker Regulatory Oversight

Licensing by top-tier regulators like FCA, ASIC, or BaFin indicates transparency, fund safety, and international compliance.

Next, we will examine the regulation of brokers. The table below outlines the regulatory bodies and their key features:

Differences Between Regulated and Unregulated Brokers

Whether a broker is regulated or not reflects its level of transparency, security, and reliability.
These two categories of brokers differ significantly in several key areas.
Differences Between Regulated and Unregulated Brokers:

Regulated brokers offer greater fund security and legal protection compared to unregulated brokers, where traders may face elevated risks.

Liquidity Management by Forex Brokers

Forex brokers ensure efficient execution by sourcing liquidity from Tier-1 banks and financial institutions.

Using Liquidity Aggregation Systems, brokers consolidate pricing from multiple sources to offer optimal market prices. Order routing then determines the execution path.

During volatility or liquidity shortages, brokers use liquidity risk management strategies such as volume limits, spread adjustments, or provider switches.

Steps in broker liquidity management:

1. Connecting to LPs for deeper markets and better pricing
2. Liquidity aggregation from multiple providers
3. Order routing based on order volume, market speed, and internal policies
4. Liquidity risk management using volume caps or spread changes

Modern Technology Used by Forex Brokers

Modern brokers use advanced technologies for better speed, security, and performance:

• ECN Connectivity for direct, intermediary-free trading
• Liquidity Aggregation Systems to offer the best bid/ask prices
• VPS (Virtual Private Servers) for ultra-fast, uninterrupted execution
• FIX API for fast execution and bot connectivity
• AI and Machine Learning for data analysis, pattern detection, and forecasting
• Advanced platforms like MetaTrader 5 and cTrader
• Cybersecurity tools such as SSL encryption and IDS/IPS systems

Conclusion

Forex brokers act as intermediaries between traders and the global currency market using models such as Market Maker, STP, and ECN.

Key evaluation points include order handling, liquidity sourcing, applied technologies, and regulatory structure.

To understand how Forex brokers work, one must explore:

• The A-Book vs. B-Book models
• Regulated vs. unregulated brokers
• Trading account types
• Role of liquidity providers

Ultimately, modern brokers leverage advanced technology and strict compliance to deliver a fast, safe, and transparent trading environment.