Account models — netting, hedging, broker tiers
Two ways your broker can book your trades, four kinds of broker that exist in the wild, and why both decisions quietly shape your daily P&L.
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Account models in 90 seconds
Two account models (netting vs hedging). Four broker tiers (A-book / B-book / market-maker / prop-funded). Most US brokers force netting; most non-US brokers offer hedging.
- Netting: one open position per symbol. Buy 0.10, sell 0.04 → net +0.06. Simple, FIFO, used in US (NFA rules).
- Hedging: every ticket is its own object. Buy 0.10 + sell 0.04 = two open tickets, two SLs, two TPs. Used by most non-US brokers; supports complex EAs.
- Broker tiers: A-book (passes flow upstream), B-book (takes the other side), market-maker (B-book with custom quotes), prop-funded (you trade their money after evaluation).
- Hybrid is the modern norm: regulated brokers run mostly A-book on larger flow and B-book on tiny retail. Both are legal.
- Prop firms (FTMO, FundingPips, FundedNext) are not brokers — they're a different model: pass a $200-$1000 evaluation, get given a $10k-$200k 'funded' account, split profits 75-90/10-25.
The prop firm world had its 2023 reality check, and the modern landscape only makes sense if you know it:
The largest prop firm at the time was alleged to be running an internal-only trading book; reshaped how the prop scene is regulated.
SourceSame three trades on netting vs hedging
Scrub through three timed trades and watch how the two account models book them. Netting collapses to one position; hedging keeps three tickets.
FIFO. Required for US-regulated retail forex (NFA Rule 2-43).
Default for most non-US regulated brokers. Required for grid / multi-leg EAs.
- #1: +0.10
How accounts actually book trades
Netting — one bucket per symbol
On a netting account, every trade on a symbol gets pooled into a single net position. Buy 0.10 lot EURUSD at 1.0870 → you have one open position of +0.10 at 1.0870. Then sell 0.04 at 1.0880 → MT5 partially closes the long, books a $40 profit, and leaves you with one open position of +0.06 at 1.0870. There's only ever one number on your account per symbol: a signed lot size and a weighted-average entry price.
Netting is FIFO by design (First In, First Out): the order that fills first is the one that gets reduced when an opposite trade comes in. This is the model required by US regulation (NFA rule 2-43), and it's the default on Interactive Brokers and other institutional platforms. Simpler accounting; harder to run complex EAs that want to keep parallel positions open.
Hedging — every ticket is its own animal
On a hedging account, every order is a separate ticket. Buy 0.10 EURUSD at 1.0870 → ticket #1, +0.10, SL/TP attached to ticket #1. Then sell 0.04 at 1.0880 → ticket #2, −0.04, *separately*. You now have two open tickets that hedge each other partially. Each can have its own SL, its own TP, its own comment, its own magic number (for EA tagging). MT5's hedging mode is the default for most non-US regulated brokers.
Why this matters: complex EAs (grid strategies, multi-leg hedges, partial scaling-in strategies) need multiple open positions on the same symbol with different parameters. You can't run those on netting. Conversely, hedging accounts can confuse beginners — closing 'the trade' is ambiguous when there are five open tickets, and FIFO rules don't apply, so you have to be explicit about which ticket you're closing.
Choosing between them — pick based on what you'll do, not what feels safer
If you're going to trade discretionarily (one trade at a time, manual SL/TP), either model works fine; pick whichever your broker offers by default. If you're going to run EAs you didn't write yourself, check whether the EA needs hedging — most retail MT5 EAs do, because that's what the MT5 retail ecosystem grew up on. If you're going to write your own EAs, hedging gives you more design freedom; netting forces clean, simple position management (which is often a virtue).
One practical note: switching account models on an existing account is not allowed at most brokers. You pick at account creation, and it sticks. If you're not sure, open one of each on demo and see which one's UI feels right.
Broker tiers — who is on the other side of your trade
Once you've picked an account model, the next question is what kind of broker you've signed up with. The retail forex world has roughly four kinds:
**A-book**: the broker passes your trade through to an upstream liquidity provider (a bank or aggregator). They earn a small markup on the spread or a commission. Your profit is their indirect interest; their interest is your continued trading.
**B-book**: the broker takes the other side of your trade themselves. Your profit is *their* loss, your loss is their profit. This sounds adversarial, but it's standard, legal at regulated brokers, and economically necessary for very small retail trades that wouldn't survive being passed upstream. Most regulated B-book brokers manage risk by aggregating thousands of small clients — the law of large numbers smooths their P&L.
**Market-maker**: a B-book with the additional power to quote their own prices (within regulator-defined limits). Spreads can be wider, execution looser, slippage more common. Often the cheapest to start with but the most expensive to scale on.
**Prop-firm-funded**: you don't have an account in the traditional sense — you pass a paid evaluation (typically $50-$300 fee, two-stage challenge) and the firm gives you access to a simulated 'funded' account at $10k-$200k notional. Profits split 75-90 % to you, 10-25 % to the firm; losses are bounded by the firm's drawdown rules, not by your capital. The 2023 MyForexFunds enforcement (story below) reshaped this segment significantly.
Key terms
Four broker tiers — who you're actually trading with
Behind every MT5 account is one of four models. None is inherently good or evil; all are legal at regulated brokers. The differences show up in spread, execution speed, conflict-of-interest exposure, and whether your trades affect 'real' upstream markets at all.
- Direct market exposure — your trades affect upstream books
- Cleaner conflict-of-interest story
- Tighter spreads on majors during liquid hours
- Often supports ECN-style raw spreads + commission
- Higher minimum deposit
- Commission per round-trip
- Less hand-holding for absolute beginners
- Low minimum deposit
- No commission (revenue is in the spread)
- Often more polished apps and onboarding
- Sometimes wider asset selection (CFDs on stocks, indices, etc.)
- Conflict-of-interest exists structurally (your loss = their revenue)
- Spreads slightly wider during liquid hours
- Withdrawal experience is the single best test of broker honesty (see L12)
- Highest leverage available (1:500 or 1:1000+)
- Often deposit bonuses, demo competitions, etc.
- Lowest entry barriers
- Weak regulatory recourse if something goes wrong
- Custom price feeds that can deviate from upstream
- Conflict of interest highest here
- Withdrawal complications most common
- No personal capital at risk beyond the evaluation fee
- Access to $10k-$200k notional accounts
- Profit splits 75-90 % to the trader on most firms
- Strict daily and max drawdown rules (often 4 %/8 %)
- Many participants never pass the evaluation
- Evaluations are simulated — no live ticks until 'funded'
- Profit splits are paid only if you're in good standing; rules can be tightened retroactively
The 2023 prop-firm shakeout
The prop-firm gold rush had its biggest correction yet in 2023. Knowing this changes how you evaluate the segment.
The largest prop firm at the time was alleged to be running an internal-only trading book; reshaped how the prop scene is regulated.
On August 29, 2023, the CFTC and Ontario Securities Commission jointly shut down MyForexFunds, then the largest prop firm in the world (~135,000 customers, ~$310 M in evaluation fees collected). The complaint alleged the firm was running its 'funded' accounts entirely on internal simulated books — no upstream liquidity exposure — and structuring rules to maximise evaluation failures. The shutdown reshaped the segment: surviving prop firms (FTMO, FundingPips, FundedNext, The Funded Trader) tightened risk-of-ruin disclosures, dropped some marketing claims, and several moved to broker-licensed infrastructure. The model itself isn't broken — it survives as a legitimate way for disciplined retail traders to scale beyond personal capital. But the 'easy money' flavour is gone, and that's healthy. Lesson 12 covers how to evaluate any specific prop firm.
SourcePractice — check your own account model
10-minute practice — identify your demo broker's setup
Open MT5 with your demo broker. We'll figure out which account model you're on and what broker tier sits behind it.
- 1
MT5 → Tools → Options → Server tab. Note the server name (e.g. 'ICMarketsSC-Demo'). The prefix is usually the broker's commercial name.
- 2
Open the Trade tab in Toolbox. Place a 0.01 lot Buy on EURUSD. Note the ticket number. Now place a 0.01 lot Sell on EURUSD. If you see TWO separate open positions in Trade — hedging account. If you see ONE position with reduced volume or it's auto-closed — netting.
- 3
Google your broker name + 'A-book' or 'execution model'. Regulated brokers usually disclose their execution model in their legal docs. Most are hybrid; a few are pure A-book (Pepperstone Razor, IC Markets Raw Spread, Tickmill ECN).
- 4
If you're tempted by a prop firm later, check whether they're licensed as a broker, an OTC trading entity, or unregulated. The CFTC and FCA both publish broker registers; prop firms typically aren't on them, which doesn't make them illegal — but it changes your recourse if there's a dispute.
Mastery check
Six questions on netting vs hedging and broker tiers. Pass at 5 of 6.
Account models — quick check
Test your understanding with 6 questions. Pass with 5/6 correct.
Reflect
Reflection
Type your honest answers — saved on this device only. Use them next week to spot patterns in your trading thinking.
Pro deep dive — under the books
If you came in already familiar with retail forex, here's the layer of detail that often gets glossed over.
FIFO and the NFA rule 2-43
US-regulated retail forex brokers (FXCM, OANDA US, Forex.com, etc.) operate under National Futures Association rules. Rule 2-43 mandates FIFO accounting (the first lot opened on a symbol is the first closed) and disallows hedging accounts. The historical rationale: protecting retail traders from the complexity of multi-leg same-symbol positions. The practical effect: every US retail account is netting. MT4/MT5 in US installations expose only the netting model. Many EAs and signal services aren't compatible — which is a major reason a meaningful fraction of US-based serious retail traders end up at non-US regulated brokers.
B-book economics — why it's not automatically evil
A B-book broker absorbs client P&L into its own book. The structural concern is conflict of interest: the broker wins when the client loses. In practice, regulated B-books manage this via three mechanisms: (1) client-fund segregation (your deposit is held in a separate bank account, ring-fenced from the broker's operating capital); (2) regulatory capital requirements (the broker holds enough operating capital to absorb statistical worst-case client P&L); (3) automatic A-booking of any client whose account grows beyond a threshold (typically the top ~5 % of P&L) — so the broker doesn't bear the risk of a consistently winning client. The CFD industry's better players have run this model for 20+ years without major incident. The worse ones are easier to spot (Lesson 12) than people assume.
Why prop firms exploded 2020-2023 and contracted 2023-2024
The retail prop-firm model was largely created by FTMO in 2015 and exploded post-COVID. By 2022 there were 100+ prop firms competing on evaluation prices ($50-$500) and account sizes ($10k-$400k). Margins were good (most evaluations failed; the firm kept the fee). MyForexFunds at its peak was processing thousands of evaluations a day. The CFTC/OSC enforcement in Aug 2023 alleged it was running entirely simulated books with rules engineered for failure, plus undisclosed commissions. The shutdown reshaped the industry: survivors now disclose more about their risk model, several rebuilt on regulated broker licences, and the segment is smaller but more credible. As an aspiring retail trader: a prop firm is a reasonable scaling tool once you have a verified track record, not a starting point.
Bibliography
Show answer
Netting collapses every trade on a symbol into one net position with FIFO closing; hedging keeps each ticket separate with its own SL/TP, so multiple positions can run simultaneously on the same symbol. Most US-regulated retail forex is netting (NFA rule 2-43); most non-US regulated is hedging. The four broker tiers are: A-book (passes flow upstream, makes money on spread/commission), B-book (takes the other side of client trades, regulated B-books survive via large-number aggregation and client-fund segregation), market-maker (B-book with custom quotes, often offshore), and prop-firm-funded (you pay an evaluation fee, get a simulated funded account on passing, split profits). All four are legal at regulated brokers; the difference shows up in execution quality, conflict-of-interest exposure, and withdrawal reliability.
Educational material only — not investment advice. Trading carries risk of capital loss. Always practice on demo and use a stop-loss. ← Back to Forex Basics