Let’s continue our discussion on how A-Book brokers make money.
If your broker is not taking any risk on the trade, there are two primary ways for an A-Book broker to make money:
In the previous examples, Elsa (the customer ) and the broker had the same entry and exit prices.
The way the broker can make money here is by charging Elsa a commission.
They normally charge commissions according to the size of your trade. The way it’s expressed can vary between brokers.
They can charge it per lot, per million USD, or as a percentage of the trading volume.
For example, a broker may charge you $60 per $1M or $6 per standard lot.
Depending on the broker, they may offer discounted commissions based on your trading volume. The more you trade, the bigger the discount.
For example, if you trade over $100M volume per month, instead of paying $60 per $1M, you might receive a 33% discount, and it would reduce your commission to $40 per $1M.
The other way an A-Book broker can make money is by applying a price markup or “marking up the spread”.
This is where a broker adds an extra amount to the pricing for its customers.
The broker makes money because the prices it trades with its liquidity providers (LPs) are better than the prices it trades with its customers.
The markup is the difference between the price shown to the clients and the price taken from the LPs.
This markup is similar to buying food at your grocery store.
The store pays “wholesale” prices and charges you a “retail” price. The difference between the two prices is the markup.
This is how the grocery store makes money in exchange for providing you with a service (access to food).
Otherwise, it would make no profit and be out of business.
The same concept applies to the A-Book broker. In exchange for providing a service to its customers (the ability to speculate on currency prices), it makes money by adding a price markup.
It pays “wholesale” prices from liquidity providers and charges you “retail” prices.
Essentially, an A-Book broker acts as a liquidity retailer.
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