An A-Book forex broker can only earn profits from markups IF the rates at which it trades with the LP are better than the prices at which the broker trades with its customers.
If not, the broker transfers the market risk but does NOT make any profit and quite possibly, may even incur a loss.
Example: A-Broker Losing Money Due to Negative Markup
Here’s an example that shows what happens when a broker receives worse prices from a liquidity provider compared to the prices the broker provides to its customer.
Elsa opens a long AUD/USD position at 0.7500.
Her position size is 1,000,000 units or 10 standard lots. This means a 1-pip move equals $100.
Immediately after, the broker offloads the risk by opening a long position with an LP at 0.7502.
Notice how the buy price provided by the broker to Elsa is BETTER than the buy price provided by the LP to the broker.
The broker is providing better rates to Elsa than it’s receiving from the LP!
From the broker’s perspective, this is not good.
AUD/USD rises in price.
Elsa decides to exit her position at 0.7550 which results in a gain of 50 pips or $5,000 ($100 x 50 pips).
The broker also exits its position with the LP at 0.7548.
The broker’s sell price to Elsa is BETTER than the LP’s sell price to the broker.
Once again, the broker has provided better rates to Elsa than it’s receiving from the LP.
As you can see, this is a money-losing operation for the broker.
The broker can’t continue to operate this way or it won’t stay in business for long.