How A-book brokers earn, and what limits them.

When you buy one lot of EUR/USD from an A-book broker, the broker buys the same lot from a bank or large trading firm a moment later. Your gain or loss is matched by that firm.

The broker earns only from what it adds on top, so its income per trade is small and does not depend on whether you win. The sums below use round illustrative prices and costs.

Where does an A-book broker's money come from?

In the A-book model, the broker offsets each client trade with a liquidity provider, a bank or trading firm that quotes prices and takes the other side. The broker ends up flat, so price moves do not change its profit.

Its income comes from charges on trades and open positions:

• A markup, extra width the broker adds to the provider's spread.
• A commission, a fixed fee for each lot traded.
• A swap markup, a small addition to the overnight financing charge.
• Account fees, such as currency conversion or inactivity fees, where the broker charges them.

On swap, say the provider charges the broker $5.00 per lot to hold a long position overnight and the broker charges you $6.50. The broker keeps $1.50 a night. The swap lesson explains the base charge.

Markup and commission are the two charges you meet on every trade, and brokers offer them through different account types.

A standard account usually carries a markup and no commission. A raw spread account passes on a tight spread and charges commission, as the account types lesson shows.

How does a spread markup work?

Say a liquidity provider quotes EUR/USD at a bid of 1.10000 and an ask of 1.10004. A pip on this pair is 0.0001, so that is a spread of 0.4 pip.

The broker adds 0.5 pip to each side. Its clients see a bid of 1.09995 and an ask of 1.10009, a spread of 1.4 pips.

Now follow a round trip, one open and one close, on 1 standard lot of 100,000 euros. Each pip is worth $10 on this size.

1. You buy at the broker's ask, 1.10009.
2. The broker buys the same lot from the provider at 1.10004, keeping 0.00005, which is 0.5 pip or $5.
3. Later you sell at the broker's bid, which sits 0.5 pip below the provider's bid.
4. The broker sells to the provider at the provider's bid and keeps another 0.5 pip, $5.
5. The broker's total is 1.0 pip, or $10, whatever the price did in between.

That income is the same whether your trade won or lost. The broker's remaining risk is the short gap between filling your order and placing its hedge.

How does a commission account compare?

On a commission account the broker passes the provider's 0.4 pip spread straight through and charges a fee per lot instead. Assume $3.50 per lot on each side, so $7 for the round trip.

The table shows where your cost goes on 1 lot of EUR/USD on each account. The broker's own per-lot costs are set at $2, a placeholder.

In this example the commission account costs you less and earns the broker less. Real accounts can fall the other way, so compare the total cost of a round trip, as the commission per lot lesson shows.

What does routing every trade cost the broker?

The $2 in the table stands for costs that brokers rarely publish. Some of them grow with every lot traded:

• Fees to a prime broker, a large firm that gives the broker access to several liquidity providers, often charged per million dollars traded.
• Payments to introducing brokers, partners paid per lot for the clients they refer.

Those IB payments come out of the broker's own per-lot income. A rebate passes part of that payment back to the trader, as with rebates at Exness.

Other costs stay much the same each month however much clients trade. They include bridge and aggregator software that links the platform to provider prices, platform licences, servers and the staff who run them.

The broker must also post margin with its provider to hold its hedge positions. That money is tied up and cannot be used elsewhere.

The fixed costs decide how big the broker must be to stay in business.

Why does an A-book broker need so much volume?

Suppose a broker has fixed costs of $200,000 a month and nets $5 per round-trip lot after its per-lot costs, the commission figure from the table.

1. Break-even volume is $200,000 ÷ $5 = 40,000 lots a month.
2. At 30,000 lots it nets 30,000 × $5 = $150,000, a loss of $50,000.
3. At 60,000 lots it nets 60,000 × $5 = $300,000, a profit of $100,000.

With the markup figure of $8 a lot, the same costs need $200,000 ÷ $8 = 25,000 lots. Both cases are illustrative, and both show that thin income per lot needs high volume.

This also tells you what an A-book broker wants from you. It gains when clients trade more often or in larger size, so promotions built around trading volume deserve a careful read.

What else limits an A-book broker?

The broker can pass on only the prices its providers give it. When providers widen their quotes, for example around major data releases or the daily rollover, your spread widens too.

Providers can also reject or reprice an order. Some use last look, a short window in which the provider can decline a trade at the quoted price. For you that can mean a requote or slippage.

Providers watch the trades they receive. If a broker's flow keeps profiting from prices that are a fraction of a second old, a provider can widen its quotes to that broker or stop dealing with it.

Sudden price gaps are a bigger danger. If a client account falls below zero in a jump, the broker still owes its provider the full loss on the hedge. With negative balance protection, the broker absorbs that shortfall itself.

A gap of this kind came in January 2015, when the Swiss National Bank dropped its minimum rate of 1.20 francs per euro. The franc jumped in minutes and client accounts went below zero, leaving several brokers with losses that threatened their survival.

Small trades are a limit too. Each order carries some fixed handling cost, and some providers set minimum trade sizes, so brokers often group small orders or handle part of the flow themselves.

Handling flow in-house moves the broker away from a pure A-book, which the lesson on internalisation covers.

Before you open an account, read the broker's client agreement and order execution policy, which usually state whether it deals as agent or as principal. The STP and ECN lesson explains how routed orders get filled.