Let’s continue our discussion from yesterday’s discussion of the challenges of A-Book execution.
If a broker is going to rely on price markups for its main revenue source, the price difference between what it receives from liquidity providers and what it sends to its customers must be in favor of the broker.
The broker accomplishes this by:
If this trade is executed with a delay, the broker may still incur a loss if the price is changing rapidly.
Experiencing price slippage is the risk for A-Book execution for a broker.
When it displays a price to a customer, the A-book broker MUST execute on that price.
So when it comes time to hedge, it needs to make sure that it receives better prices from its liquidity providers. Otherwise, the broker will end up giving a better price to its customer and will lose money!
This is the equivalent of a grocery store selling a loaf of bread for $5 to its customers that it bought for $4.
If the store wants to make a profit selling bread, it needs to make sure if it promised its customer $5 bread…..that it can get it from its wholesale supplier for less than $5.
Otherwise, the grocery store won’t be in business for long.
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