Market anatomy
Market Anatomy & Broker Models
The surface shows your trade. Contracts, prices and risk relationships explain what happens behind them.
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Four levelsModel explorerAgentPrincipalMarket makerSTPA-BookB-BookHybrid hybridCredit protectionCostsBroker profileSourcesFour levels that belong together.
“STP”, “Market Maker” and “A-Book” answer different questions. Those who use them as interchangeable quality labels conceal contractual and risk relationships. The following definitions combine regulatory terms with industry names expressly labeled as such.
MiFID II defines proprietary trading and market making. We use the industry terms A-Book and B-Book here for the risk treatment described; they are not uniform regulatory approval categories.
[MIFID]Consider order route and risk separately.
Schematic learning models. No representation of a specific broker, no statement about its approval or execution quality.
Agent · Contract role
The intermediary or executing service provider acts for the customer. Who concludes the actual trade and with whom the contract arises, must emerge from the contract documents. „Agent alone says nothing about every process step or every remuneration.
Revenue and risk
Commission, execution fee or other disclosed remuneration; the specific agreement decides.
Consequence for users
The selection of execution venues, remuneration incentives and affiliates remains subject to scrutiny.
Who is my counterparty? To whom is the order transmitted? Who pays the mediator?
Principal · Contract role
The provider acts on its own behalf as a counterparty. In the case of an OTC CFD, the position vis-à-vis this provider arises. A separate hedge with another company does not automatically change the customer contract.
Revenue and risk
the spread, fees, funding and, where applicable, the outcome of an unhedged market position.
Consequence for users
Counterparty risk and control over execution conditions. Hedging, own funds and control systems are relevant.
Which legal entity owes the payment? How are client funds and claims protected?
Market Maker · Pricing
A market maker sets buy and sell prices and is willing to trade against their own capital. The term refers to a function. It demonstrates neither full internal risk bearing nor a specific execution standard.
Revenue and risk
Spread and, where applicable, fees; risks and hedging costs are in contrast.
Consequence for users
Check the quality and origin of quotes, spread adjustment, tradable size and rules in case of volatility.
How do the courses come about? Which reference markets, mark-ups and derogation conditions apply?
STP · Technical process
Straight-through processing describes automated processing. The NFA defines STP for its forex rule more narrowly: automatic counterposition with another counterparty before client execution, without human intervention or exception. An advertising label does not have to use exactly this definition.
Revenue and risk
Possible commission or surcharge on the externally purchased price; the fee structure must be checked separately.
Consequence for users
Automation does not eliminate counterparty risk or any conflicts of interest. Availability and quality of the hedging partner remain important.
Which STP definition is used? Is the protection before confirmation? Is the partner connected?
A-Book · Risk Treatment
Sector name for externally hedged client risk. This can be done per trade or aggregated. A net hedge does not have to replicate every single customer order one-to-one.
Revenue and risk
Fees and spread mark-ups less hedging and operating costs; review structure on a case-by-case basis.
Consequence for users
External hedging is not evidence of direct stock market access of the customer. The broker can also continue to be a principal.
Is every risk or only the net risk hedged? With whom? What are the risks?
B-Book · Risk Treatment
Industry name for internally borne client risk without appropriate external hedging of the risk under consideration. Customer positions can partially balance each other. Economically relevant is the remaining net exposure.
Revenue and risk
In addition to fees, the result can be the internally borne risk; in the simplified unsecured counterparty model, the market success of the customers has the opposite effect.
Consequence for users
Structural conflicts of interest require particularly careful consideration. The designation alone does not prove any manipulation and does not replace any regulatory assessment.
What exposure is carried internally? How are execution and conflicts of interest independently controlled?
Hybrid · Risk Treatment
A provider combines internal risk-bearing with external hedging, for example when a risk threshold is exceeded. Treatment may vary by instrument or portfolio. A fixed provider drawer can miss this process.
Revenue and risk
Mixed sources of revenue and risk; changes in hedging affect the outcome.
Consequence for users
Selection rules, changes and possible impacts on customer groups must be verifiable.
When does the risk treatment change? Does it affect the rules of execution? How are changes logged?
Hedging does not eliminate conflicts of interest.
ESMA has historically distinguished between complete, missing and partial hedging of CFD client risks. The broker can remain counterparty in all described variants. The authority identifies remaining conflicts, such as hedging within the group or unequal treatment of price deviations. In the case of completely unsecured counterparty activity, it assesses the conflict particularly critically. This historical classification is not a current admissibility decision to a named provider.
[ESMA]In addition, an external transaction does not protect against every failure: the broker can remain obligated to the customer, while a hedging partner fails or a counter-position does not come about in time. Which safeguards exist must be derived from the contract, supervision and actual process.
If the customer gains 100 euros from the market movement in the unsecured counterparty transaction, the broker faces an opposite result before fees and other positions. A suitable external counterpart can compensate for this market result. This is an economic model calculation, not a statement about sales, balance sheet profit or every single customer business.
The spread is only part of the cost.
In its multi-company audit, the FCA found gaps in cost consideration and disclosure, including overnight financing. It also addresses separate, opposing customer positions that can continue to generate costs. Thus, the model comparison includes a complete cost accounting: spread, commission, financing, conversion and other contractual fees.
[FCA]A position in MetaTrader “hedging” account mode means that opposite positions can be held side by side. It does not follow that the broker has externally hedged his own customer risk. Differentiate platform and account model
A broker profile needs more than one model label.
- Identify legal entity, registered office, registry and oversight identifier.
- Determine the counterparty and contract on the basis of valid documents.
- Assign instrument, account, server and execution mode.
- Check price source, fees and execution rules.
- Mark hedging as a confirmed indication, provider claim or open question.
- Describe conflicts of interest and controls with specific sources.
In the case of external protection, the name and role of the partner are to be published only if a reliable source confirms this relationship and the period. A pure connection in a network is not proof of use.
Sources & scope
Check the evidence.
- MiFID II · Art. 4, Definitions
Historical consolidated version for definitions; review current law separately.
Open the source ↗ - ESMA · Q&A on CFDs, 2016 · SECTION 5, pp. 18–20
Historical MiFID classification; no blanket current legal assessment.
Open the source ↗ - NFA · Rule 2-36(s)(5), Definition STP
US rule with its own scope; reviewed 30.09.2026.
Open the source ↗ - FCA · CFD price and value review
Multi-company supervisory audit; not transferable to each provider.
Open the source ↗
Who is actually allowed to make the offer?
Examine permission, provider role, market access and protection requirements for EU, UK, Switzerland and USA together.
Regulatory Requirements · Part I →