Description: Market Makers and Liquidity Providers are the most common business models used by forex brokerage firms to operate. The next sections look at how each model works, as well as the benefits and drawbacks of each one.

A forex brokerage company may start its activities in the manner in which it intends to conduct its business and can be engaged in the trading process or act as a middleman between buyers and sellers. Brokers who are active in trading against their customers get their revenue from the actual trading they do rather than through commissions and fees. Those that operate as intermediaries charge a fee in exchange for facilitating the access of traders to liquidity.

A-book processing and B-book processing are the names of these two types of Forex brokerage models.

Market Maker (B-book) Brokers

In contrast to liquidity providers, B-book brokers take the opposite side of their customers' transactions and do not send the orders through to a third party. In reality, some Market Makers earn commissions by providing liquidity to the businesses that they represent on behalf of their customers.

In other words, Forex traders are trading against the broker, and any profits gained by the trader are offset by the loss that is sustained by the Forex brokerage firm. Because of the high likelihood of making a profit for the brokerage, many Forex brokerages choose to operate under this strategy.

Despite this, brokerages who set up as B-book dealers face a hefty price tag. The establishment of trading desks, as well as algorithmic trading, which automatically takes the opposing side of customers' transactions, are examples of these strategies. In order to calculate profits, these expenses must be subtracted from them.

Providers of Liquidity (A-book)

This approach of setting up a brokerage is less complicated since the broker is just acting as a middleman. By forwarding orders to liquidity providers, the trader may access the interbank market without the need for a separate brokerage account.

In this case, the best bid-ask spread will be used and will be communicated to the customers. This kind of business model is referred to as A-book processing or Straight Through Processing (STP), and it is characterized by the broker earning a fee depending on the number of transactions that its customers create.

Despite the fact that it may not be as lucrative as a Market Maker, this style of brokerage is more transparent and is thus regarded in better regard by the market community. In addition, if revenues from the brokerage are properly spent with a sound strategy that focuses on recruiting as many active traders as possible and providing them with extra services to improve their income, the company model may be quite profitable as well. Using liquidity providers as a data feed provider, for example, allows certain users to get forex data feeds (either historical or real-time) regarding currency pairings for use in online calculators.

Some brokerages are active in both A-book and B-book processing, which is referred to as a hybrid model. This may be established by taking a look at the kind of trading conditions that are available to you. This model will be used by brokers to divide traders into two categories based on characteristics such as the size of the trading account and the length of time they have been participating in the Forex market, among other things. Therefore, the brokerage off-sets a part of the deal into the actual market (A-book) and stores the remaining trades (B-book).

Practically, both the Market Maker and the Liquidity Provider business models perform essentially the same functions; therefore, when deciding which business model to adopt, brokerages should consider the operational and regulatory aspects of each model and determine which model offers the greatest long-term profit potential.