How to know if your broker is trading against you

The simple truth is that most forex and CFD brokers are trading against their clients. The details in how this is accomplished vary greatly from broker to broker. Broadly speaking, we can say there are two types of brokers: A Book brokers and B Book brokers:

• A Book brokers may technically be trading against their clients in that they are taking the opposite side of the trade, but they generally are taking a risk neutral approach to the market and are looking to immediately offset the trade. So they are not trading against their client in spirit, only in technicality.
• B Book brokers will choose what positions of their clients they wish to offset. As such, they are willing to take a directional position in the market, and thus may be trading against their clients in a more material way. For instance, suppose the B Book broker wants to take a long Euro position in the market. To do this, they may not offset the short Euro trades their clients have put on; rather, they will simply take the other side of these trades.

A Book and B Book brokers can both run into big problems - for themselves, and in turn, their clients - if the larger banks and brokerage firms they offset orders with no longer take positions. This risk is known as liquidity risk. We saw liquidity risk have a devastating impact on both A Book and B Book brokers when the Swiss National Bank unpegged the Swiss Franc from the Euro, resulting in a huge move in a matter of minutes.

You can ask your broker directly about their dealing desk policy. This is largely because they feel uncomfortable about admitting their status as the counterparty to your trade, and because they generally do not educate their staff in the nuances of how they operate and make money.