Challenges of the A-Book Execution Model
The A-Book execution model has its own set of challenges.
An A-Book broker only makes a profit from markups if the prices it gets from liquidity providers (LPs) are better than the prices it offers to customers.
If the broker receives worse prices from the LP than what it offers clients, it transfers the market risk but does not earn a profit—in fact, it might even suffer a loss. 😬
Example: When an A-Book Broker Loses Money Due to Negative Markup
Let’s look at a situation where the broker gets worse prices from the LP than the prices it gives to the customer.
Elsa opens a long AUD/USD position at 0.7500 for 1,000,000 units (10 standard lots), where 1 pip equals $100.
Right after, the broker hedges by buying AUD/USD from the LP at 0.7502.
Here, the broker offers Elsa a better buy price (0.7500) than what it gets from the LP (0.7502)—which is unfavorable for the broker.
AUD/USD price rises, and Elsa closes her trade at 0.7550, making a profit of 50 pips or $5,000.
The broker closes its hedge at 0.7548, again giving Elsa a better price to sell (0.7550) than what it receives from the LP (0.7548).
Because the broker consistently offers better prices to Elsa than it receives from the LP, it ends up losing money.
Why This Matters
The broker cannot keep operating like this without going out of business.
To earn revenue from price markups, the broker must ensure the price difference between what it pays LPs and charges customers favors the broker.
This is done by:
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Using LP prices as the base for customer quotes, only showing prices where the markup is profitable.
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Executing trades with LPs simultaneously to hedge customer trades (“hedge,” “offset,” or “cover”).
If the hedge trade happens with delay, especially in fast-moving markets, the broker risks losses due to price changes—known as price slippage.
Price Slippage Risk in A-Book Execution
When the broker quotes a price to a customer, it must honor that price.
To avoid losses, it needs to secure better prices from liquidity providers.
If it can’t, it’s like a grocery store selling bread for $5 while paying $6 to the supplier — eventually, the business fails.
Summary
An A-Book broker must carefully manage price differences to stay profitable. If the markup isn’t positive, the broker will lose money and risk going out of business.