Most people who trade forex have a basic idea of what a spread is — the difference between the buy price and the sell price on any given instrument. However, very few traders — and surprisingly few aspiring broker founders — understand the full mechanics of how that spread is created, where it comes from and how it becomes the primary revenue engine of a forex brokerage.
Understanding how retail accounts differ from covering accounts, how brokers source liquidity from liquidity providers and how the spread markup model works is essential knowledge for every aspiring forex broker founder. Furthermore, it is useful context for any trader who wants to understand how their broker actually makes money on every trade they place.
This guide explains the complete model — from how liquidity providers price the market to how brokers mark up those prices for retail clients, how the covering account bridges the gap between retail and institutional execution and where the broker’s profit actually comes from. WorldFxClub advises on liquidity provider relationships and broker setup from our Dubai base — helping every founder understand and implement the right pricing and liquidity model for their specific brokerage.
The Two Types of Accounts Every Forex Broker Operates
What Is a Retail Account?
A retail account is the trading account that the broker’s clients use — the account that traders open, fund and use to place trades on the broker’s platform. When a trader logs into MetaTrader 5 and opens a EUR/USD trade, they see the retail pricing that the broker presents to them. Furthermore, this retail pricing always includes the broker’s markup — applied on top of the raw LP price before the client sees it.
The retail account sits at the front end of the broker’s operation. It is what the client sees and interacts with directly. However, the retail account is only one half of the equation. Behind every retail account sits the infrastructure that actually makes the broker’s pricing model work — and that infrastructure centres on the covering account.
What Is a Covering Account?
A covering account — sometimes called a prime account, a liquidity account or a hedging account — is the account that the broker maintains with its liquidity provider. It is the account through which the broker accesses the raw interbank market prices. Furthermore, it is where the broker hedges its retail client exposure at the LP’s institutional pricing.
The covering account is the broker’s account with the LP — not the client’s account. It is the bridge between the institutional liquidity market and the retail trading environment. Consequently, every retail trade that a client places on the broker’s platform ultimately connects back to the covering account and the liquidity provider relationship behind it.
How Liquidity Providers Price the Market
What Is a Liquidity Provider?
A liquidity provider — commonly referred to as an LP — is a financial institution that provides forex brokers with access to interbank market prices and execution. LPs are typically large banks, non-bank market makers or prime-of-prime institutions. They aggregate liquidity from multiple sources and make it available to brokers through a technology connection. Furthermore, this connection is typically a FIX API — the industry-standard protocol for real-time financial data transmission.
The LP sits above the broker in the pricing chain. It aggregates prices from multiple interbank sources and makes a composite price stream available to the broker. Consequently, the broker takes that LP price stream and presents it to retail clients — with a markup applied to generate the spread revenue that drives the brokerage’s profitability.
How LP Pricing Works — The Million Dollar Minimum
Liquidity providers price the market for institutional-size transactions. A typical LP prices for trades starting at one standard lot — 100,000 units of the base currency — and more commonly for transactions starting at one million units or more.
This is a critical point for every aspiring broker founder to understand. The LP does not price for a retail trader placing a 0.01 lot microtrade. Furthermore, it does not offer the same pricing for a 0.01 lot trade that it offers for a one million dollar transaction. Consequently, the broker must bridge the gap between the LP’s institutional pricing structure and the retail client’s much smaller transaction sizes. This bridging function is one of the most important operational roles the covering account plays.
The FIX API Connection
The technology connection between the broker and the LP is typically a FIX API — a Financial Information eXchange Application Programming Interface. It is the industry-standard protocol for real-time financial data transmission between institutional counterparties.
Through the FIX API connection, the LP sends a continuous stream of bid and ask prices to the broker’s trading platform. Furthermore, the broker’s platform aggregates these prices and applies the configured markup. Consequently, when a client sees a price move on their MetaTrader platform, that movement originates from the LP price stream flowing through the FIX API — with the broker’s markup layer applied on top.
The Spread Markup Model — How Brokers Make Money
The Flow From LP to Retail Client
Understanding how brokers make money via spreads requires understanding the complete pricing chain — from the LP’s raw price through the broker’s markup to the retail client’s visible spread.
Step 1 — The LP prices the market
The liquidity provider generates a continuous bid and ask price stream for every instrument the broker offers. This raw price stream represents the price at which the LP is willing to buy and sell those instruments in institutional size. Furthermore, it is the foundation upon which the broker builds its retail pricing.
Step 2 — The broker receives the LP price via FIX API
The broker’s trading platform connects to the LP via FIX API and receives the real-time price stream. It then aggregates prices — often from multiple LP sources — to create the best available composite price. Consequently, the broker has a clean raw price foundation before applying its markup.
Step 3 — The broker applies a markup to both sides
The broker’s system applies a configured markup to both the bid and the ask of the raw LP price. This markup is applied equally to each side — widening the spread symmetrically. Consequently, the retail client always sees a wider spread than the raw LP price — and the difference between the two is where the broker makes its money.
Step 4 — The retail client opens a trade
The retail client places a buy trade at the marked-up ask price visible on their platform. The broker fills the client’s trade at the retail ask price. It then simultaneously hedges the exposure in the covering account at the LP’s raw ask price. Furthermore, the difference between the retail ask and the LP ask on the open trade is the broker’s spread revenue on that side.
Step 5 — The retail client closes the trade
When the client closes the trade, they sell at the retail bid price. The broker closes the hedge at the LP’s raw bid price. Consequently, the broker captures spread revenue on both the open and the close of every round trip trade.
A Simple Visual Flow — LP to Broker to Client
INTERBANK MARKET
↓
LIQUIDITY PROVIDER (LP)
Raw price: EUR/USD Bid 1.08500 / Ask 1.08501
Raw spread: 0.1 pip — institutional size pricing
↓
FIX API CONNECTION
LP price stream flows to broker platform in real time
↓
BROKER — COVERING ACCOUNT
Broker receives raw LP price
Broker applies 0.6 pip markup to each side
New Bid: 1.08494 / New Ask: 1.08507
Total retail spread: 1.3 pips
↓
BROKER PLATFORM — RETAIL CLIENT
Client sees: EUR/USD Bid 1.08494 / Ask 1.08507
Client opens 1 standard lot buy at Ask 1.08507
↓
BROKER REVENUE — OPEN TRADE
Client filled at retail Ask 1.08507
Broker hedges at LP Ask 1.08501
Difference: 0.6 pips = $6.00 per standard lot (open)
↓
CLIENT CLOSES TRADE
Client closes at retail Bid 1.08494
Broker closes hedge at LP Bid 1.08500
Difference: 0.6 pips = $6.00 per standard lot (close)
↓
TOTAL BROKER REVENUE — FULL ROUND TRIP
$6.00 open + $6.00 close = $12.00 per standard lotThis flow repeats on every round trip trade every client completes. Consequently, it generates continuous spread revenue that scales directly with the broker’s trading volume.
Understanding Pip Value — Why $10 Per Pip on EUR/USD
The Standard Pip Value Formula
For EUR/USD — and most USD-quoted pairs:
1 pip = 0.0001 price movement
For 1 standard lot (100,000 units of base currency):
Pip value = 0.0001 × 100,000 = $10.00 per pip
This is the universally accepted pip value for EUR/USD at 1 standard lot. Consequently, every pip of markup the broker applies generates $10.00 in spread revenue per standard lot traded — on each side of the round trip.
How the Markup Splits Across Both Sides
When the broker applies a 1.2 pip total markup to the raw LP spread, it splits this equally across both the bid and the ask. Furthermore, this symmetric adjustment creates a wider retail spread while maintaining the broker’s markup revenue on both sides of every client trade.
| Side | LP Raw Price | Broker Adjustment | Retail Price | Broker Markup |
|---|---|---|---|---|
| Ask — buy side | 1.08501 | + 0.00006 | 1.08507 | 0.6 pips |
| Bid — sell side | 1.08500 | − 0.00006 | 1.08494 | 0.6 pips |
| Total spread | 0.1 pip raw | — | 1.3 pip retail | 1.2 pips total |
Consequently, the broker captures 0.6 pips on the open and 0.6 pips on the close — totalling 1.2 pips of markup revenue per full round trip trade.
How the Spread Markup Generates Revenue Per Lot
The Complete Revenue Breakdown
| Component | Calculation | Value |
|---|---|---|
| Pip value — EUR/USD standard lot | 0.0001 × 100,000 | $10.00 per pip |
| Broker markup — open side | 0.6 pips × $10.00 | $6.00 per lot |
| Broker markup — close side | 0.6 pips × $10.00 | $6.00 per lot |
| Total round trip revenue | $6.00 + $6.00 | $12.00 per lot |
| 1 client — 10 lots per day | 10 × $12.00 | $120.00 daily |
| 1 client — 20 trading days | $120.00 × 20 | $2,400 monthly |
| 100 clients — 10 lots per day | 100 × $120.00 | $12,000 daily |
| 100 clients — 20 trading days | $12,000 × 20 | $240,000 monthly |
Consequently, a broker with 100 active clients each trading an average of 10 standard lots per day generates approximately $240,000 in monthly spread revenue. Furthermore, this is before any commission income, overnight swap revenue or other revenue streams are counted.
The Important Distinction — Open vs Round Trip
Many broker founders initially misunderstand the spread revenue model. They calculate revenue on the open trade only — capturing $6.00 per lot on the open and forgetting that the broker also captures $6.00 per lot when the client closes the trade.
Furthermore, some founders confuse the total retail spread width with the broker’s actual markup. The total retail spread is 1.3 pips — however 0.1 pip of that is the LP’s raw spread which passes through to the covering account. Consequently, the broker’s actual markup is 1.2 pips — 0.6 pips on each side — generating $12.00 per standard lot round trip on EUR/USD.
The Markup Decision — Competitive Pricing vs Revenue Optimisation
The markup level is one of the most important commercial decisions a broker makes. A higher markup generates more revenue per lot. However, it makes the broker less competitive — particularly with experienced traders who compare spreads before choosing where to trade.
A lower markup makes the broker more competitive — attracting higher-volume traders who generate more lots per day. Furthermore, higher volume can more than compensate for the lower per-lot margin. Consequently, most successful brokers find an optimal markup point that balances competitive pricing with sustainable per-lot revenue. WorldFxClub advises every new broker founder on the right markup strategy for their specific target market.
How Promotions Drive Trading Volume
The Role of Promotions in a Spread-Based Revenue Model
Because the broker’s primary revenue comes from spread revenue per lot traded, anything that increases the number of lots clients trade increases the broker’s revenue. This is why broker promotions — deposit bonuses, trading contests, cashback schemes and loyalty programmes — are such powerful tools in a spread-based revenue model.
A deposit bonus increases the client’s account size — giving the client more capital to trade with. Consequently, this generates more trading volume and more spread revenue for the broker. A trading contest incentivises clients to trade more actively during the contest period. Furthermore, cashback programmes reward clients for trading volume — creating a positive incentive that benefits both the client and the broker.
Why Offshore Brokers Have the Advantage on Promotions
Regulated brokers in major jurisdictions face significant restrictions on the bonus and promotion programmes they can offer retail clients. Offshore brokers — including St Lucia IBC companies — operate without these restrictions. Consequently, offshore brokers can run the full range of promotional mechanics that drive trading volume most effectively. Furthermore, this is one of the most commercially significant advantages of the offshore structure — and one of the primary reasons why even regulated brokers maintain offshore entities for client acquisition and volume generation.
The Leverage Gap — The Most Important Risk Management Challenge
What the Leverage Gap Is
The leverage gap is the most important risk management challenge every forex broker faces. Understanding it is essential for every founder planning to set up a new brokerage.
The leverage gap arises from a fundamental mismatch between two different leverage levels. The LP offers the broker one leverage level for the covering account — typically 10:1 to 50:1 for institutional accounts. The broker then offers its retail clients a much higher leverage level — potentially 100:1, 200:1 or 500:1 in some offshore markets. Consequently, when a retail client trades at 500:1 and the LP only offers the broker 50:1 on the covering account, there is a gap of 450:1 that the broker must cover from its own capital.
Why This Creates a Capital Requirement
The leverage gap creates a direct capital requirement for the broker. When a retail client opens a position at 500:1 leverage, the client’s margin requirement is very small relative to the position size. However, the broker must cover the full position size in the covering account at the LP — where only 50:1 leverage is available. Consequently, the broker must deposit significantly more capital in the covering account. This covers the LP margin requirement on positions the retail client opened at higher leverage.
A simple example:
| Component | Value |
|---|---|
| Retail client trade size | 1 standard lot — $100,000 notional |
| Retail client leverage | 500:1 |
| Retail client margin requirement | $200 |
| LP leverage available to broker | 50:1 |
| Broker margin requirement at LP | $2,000 |
| Capital gap the broker must fund | $1,800 per lot |
Consequently, for every lot the retail client trades at 500:1 leverage, the broker must have $1,800 of additional capital available in the covering account. Furthermore, this capital requirement scales directly with the total open position size across all retail clients simultaneously — creating a significant ongoing capital management challenge.
How Brokers Manage the Leverage Gap
Approach 1 — Maintaining a Capital Buffer
The most straightforward approach is maintaining a permanent capital buffer in the covering account. This is a standing deposit of additional capital that covers the leverage gap across the expected total open position size of the retail client base. Furthermore, this buffer must be actively managed as the client base grows and total open positions increase.
Advanced Approaches to Leverage Gap Management
Approach 2 — Internalisation — the B-Book Model
Many brokers — particularly at the early stages of operation — manage a portion of their retail flow internally without hedging every position in the covering account. This is known as the B-book model. When the broker B-books a trade, it takes the other side of the client’s position internally. Consequently, B-booking profitable trades removes the LP margin requirement on those specific trades — reducing the capital requirement significantly. Furthermore, this approach requires careful risk management to ensure internal exposure stays within acceptable limits.
Approach 3 — Dynamic Hedging
More sophisticated brokers use dynamic hedging strategies — hedging only a portion of retail exposure in the covering account based on real-time risk assessment of the overall client book. Furthermore, this approach requires more advanced risk management infrastructure. However, it can optimise the balance between LP margin costs and internal risk exposure more effectively than either a pure A-book or pure B-book approach.
WorldFxClub advises every new broker founder on the right approach to managing the leverage gap — based on the specific target client base, the LP relationships available and the broker’s capital position.
What This Means for Every New Broker Founder
The Three Commercial Insights Every Founder Needs
Insight 1 — Volume is everything
The broker’s revenue scales directly with trading volume — round trip lots traded per day across the entire client base. Consequently, every commercial decision the broker makes — pricing, promotions, client acquisition strategy, platform choice and product offering — should be evaluated through the lens of how it affects trading volume. Furthermore, client retention is as commercially important as client acquisition — a client who stays and trades for two years generates significantly more spread revenue than one who trades for two months.
Insight 2 — LP relationships are a competitive advantage
The quality, pricing and terms of the broker’s LP relationships directly determine the broker’s spread revenue potential and risk management capability. A broker with better LP pricing can offer more competitive retail spreads while maintaining the same per-lot revenue. Furthermore, a broker with multiple LP relationships can aggregate better composite prices. This also allows more effective risk management across the overall client book. WorldFxClub advises on LP relationships and introductions for every new broker client.
Insight 3 — Capital management is the foundation
The leverage gap means every broker needs adequate capital management from day one. Undercapitalising the covering account creates operational risk that can disrupt the entire brokerage when client positions move against the broker’s LP margin. Consequently, capital planning for the covering account should be one of the first financial modelling exercises every new broker founder completes — before launching, not after.
Frequently Asked Questions
What Is the Difference Between a Retail Account and a Covering Account?
A retail account is the trading account that the broker’s clients use — where they deposit funds, place trades and see retail pricing with the broker’s markup applied. A covering account is the broker’s account with its liquidity provider — where the broker hedges its retail client exposure at the LP’s raw institutional pricing. Furthermore, the broker captures 0.6 pips on the open trade and 0.6 pips on the close trade — generating $12.00 total spread revenue per standard lot round trip on EUR/USD. WorldFxClub advises on covering account setup and LP relationships for every new broker client.
How Do Forex Brokers Make Money via Spreads?
Forex brokers make money by applying a markup to both sides of the raw prices they receive from their liquidity provider. The LP provides a raw spread — for example 0.1 pips on EUR/USD. The broker adds 0.6 pips to the ask and subtracts 0.6 pips from the bid — creating a 1.3 pip retail spread with 1.2 pips of total broker markup. At $10.00 per pip on a standard lot, the broker earns $6.00 on the open and $6.00 on the close. Consequently, the total is $12.00 per standard lot round trip.
What Is a FIX API and Why Does Every Broker Need One?
A FIX API — Financial Information eXchange Application Programming Interface — is the technology connection between the broker’s trading platform and the liquidity provider’s price stream. It is the industry standard protocol for real-time financial data transmission between institutional counterparties. Furthermore, every broker needs a FIX API connection to receive the LP’s real-time price stream. Consequently, this price stream passes to the trading platform where clients place their trades.
What Is the Pip Value on EUR/USD and Why Does It Matter?
For EUR/USD, 1 pip equals a price movement of 0.0001. For 1 standard lot of 100,000 units, the pip value is 0.0001 × 100,000 = $10.00 per pip. Consequently, every pip of markup the broker applies generates $10.00 in spread revenue per standard lot on each side of the trade. A 0.6 pip markup on the open generates $6.00 and a 0.6 pip markup on the close generates another $6.00. Furthermore, this totals $12.00 per standard lot round trip — the foundation of every broker spread revenue calculation.
What Is the Leverage Gap and Why Does It Matter?
The leverage gap is the difference between the leverage the broker offers retail clients and the leverage the LP offers the broker on the covering account. For example, if the broker offers retail clients 500:1 but the LP only offers 50:1, the broker must fund the $1,800 difference from its own capital for every standard lot the retail client trades. Consequently, the leverage gap creates a direct and ongoing capital requirement that every new broker must plan and manage from day one.
Can WorldFxClub Help With LP Relationships and Broker Setup?
Yes. WorldFxClub advises on the complete broker setup — including LP relationship introductions, covering account setup, St Lucia IBC offshore structure, Mauritius FSC regulated structure and KHDA licensing for Dubai-based education and IB activities. Contact WorldFxClub via WhatsApp to discuss your specific liquidity and broker setup requirements.
WhatsApp WorldFxClub to Discuss Your Liquidity Setup Today
Setting up a new forex broker requires understanding the complete pricing model — from LP relationships and FIX API connectivity through to covering account management, spread markup optimisation and leverage gap capital planning. Furthermore, getting these foundations right from the outset is the difference between a broker that scales profitably and one that faces operational and capital problems as the client base grows.
WorldFxClub advises on every component of the forex broker setup from our Dubai base — LP introductions, covering account setup, spread pricing strategy, offshore and regulated entity structure and ongoing operational support.
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