Let’s take a look at how forex brokers manage their risk.
When the retail forex broker takes the opposite of a customer’s trade, it can choose to ACCEPT the market risk or TRANSFER it to another market participant.
If a broker accepts the market risk, when the trade is executed, it is called “B-Book execution”.
“B-Book execution” is just a fancy phrase for taking the opposite of your trade.
They can also describe your trade as being “B-Booked”.
And since the broker has taken on risk, here are other examples of industry jargon:
- The risk has been “internalized”.
- The risk has been “warehoused”.
Because the broker has decided to “hold” the risk, it has kept the risk for itself (“internalized”) and stored the risk (“warehoused”).
Not sure if market risk appreciates being objectified.
Depending on whether the market moves for or against the broker, accepting market risk can either be good OR bad for the broker.
Tomorrow, we will look at some examples.