In the previous lesson, we observed how A-Book brokers offload market risk but do not inherently profit from customer trades. So, how do they make money? Let’s break it down.
Revenue Streams for A-Book Brokers
Unlike B-Book brokers, who profit when customers lose, A-Book brokers rely on two primary revenue streams:
Commissions
Spread Markups
1. Commissions
A-Book brokers may charge customers a commission for executing trades. This commission is typically based on trade size and can vary in structure:
Per Lot: Charged per standard lot traded (e.g., $6 per lot).
Per Million USD: Charged per $1M traded (e.g., $60 per $1M).
Percentage of Volume: A small percentage of the total trade volume.
Example: Commission-Based Revenue
If Elsa trades $1,000,000 EUR/USD, and the broker charges $60 per $1M traded, Elsa pays a $60 commission. For frequent or high-volume traders, brokers might offer discounts. For instance, trading $100M monthly might reduce the rate to $40 per $1M.
2. Spread Markups
Another way A-Book brokers generate revenue is through spread markups. Here’s how it works:
The broker receives “wholesale” pricing from liquidity providers (LPs).
It applies a markup before quoting the price to the customer.
The difference between the wholesale price (from LPs) and the retail price (to customers) is the broker’s profit.
Example: Spread Markup in Action
The LP offers EUR/USD at 1.2000 (wholesale price).
The broker quotes Elsa 1.2001 (retail price) — a 1-pip markup.
Elsa trades 3,000,000 EUR/USD, where 1 pip = $300.
The broker earns $300 from the markup.
Trade Scenarios with Markups
Scenario #1: EUR/USD Rises
Elsa opens a long EUR/USD position at 1.2001 (retail price).
The broker hedges by buying from the LP at 1.2000 (wholesale price).
EUR/USD rises, and Elsa exits at 1.2100.
The broker sells to the LP at 1.2100 but quotes Elsa 1.2099.
Elsa profits 98 pips, costing the broker an equivalent loss.
However, the broker’s trade with the LP yields a 100-pip profit.
The 2-pip difference (markup) results in a $600 profit for the broker.
Scenario #2: EUR/USD Falls
Elsa opens a long EUR/USD position at 1.2001 (retail price).
The broker hedges by buying from the LP at 1.2000 (wholesale price).
EUR/USD falls, and Elsa exits at 1.1699.
The broker sells to the LP at 1.1700 but quotes Elsa 1.1699.
Elsa loses 302 pips, generating an equivalent gain for the broker.
However, the broker’s trade with the LP results in a 300-pip loss.
Again, the 2-pip difference (markup) results in a $600 profit for the broker.
Key Takeaways
A-Book brokers profit through commissions or spread markups, not by betting against customers.
The broker’s P&L remains unaffected by market direction due to risk hedging.
Spread markups ensure consistent revenue, regardless of customer trade outcomes.
In the next lesson, we’ll dive deeper into how brokers manage liquidity relationships to optimize profitability.
