Customer Profiling in the Hybrid Model.

Let’s look at customer profiling in the hybrid model.

The forex broker has to decide which customers go to A-book and which go to B-book.

Once these rules and criteria are set, the broker will have an “order routing system.”

Or an “order execution engine” whose purpose is to manage orders by sending them to A-Book or B-Book automatically.

The broker will most likely hold the trades of losing traders for themselves.

And then hedge against the trades of profitable traders.

Successful traders will be A-Booked.

The small unprofitable traders will be B-Booked, where the market risk is kept “in-house”

To successfully identify profitable and unprofitable traders, forex brokers have software that analyzes how customers trade.

They can profile traders by the amount of their deposit, the notional value of each trade, the leverage used, the risk taken with each trade, the use or non-use of protective stops, etc.

Example

For example, there seems to be a common pattern of behavior among losing traders.

These behaviors include:

• Depositing a tiny amount of cash, which means a tiny starting account balance (usually less than $1,000).
• Risking 10% or more of their tiny account balance per trade.
• Not using stop losses.
• Adding to losing trades.
• Using high leverage on their tiny accounts makes them frequently susceptible to margin calls and stop outs.

With the use of computer algorithms, brokers are able to analyze trading patterns to profile the trades of each customer.

Brokers can be different “brokers” to different customers.

It can be a B-Book broker to some and an A-Book broker to others.

The reasons behind customer profiling are simple.

The customers who are A-Booked are more successful.

They will generally trade in larger lot sizes.

So fully offsetting these orders with an external counterparty eliminates exposure to market risk while still earning a (small) fee from the spread.

The customers who are B-Booked will generally be small orders, mostly losing trades.

And the broker can warehouse the market risk since the risk is small because the trade size is small.

This allows the broker to profit from losing trades from its B-Book customers.

In addition, they will earn from the price markup from its A-Book customers.

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