What types of MetaTrader-Brokers are there for order processing?

Not any MetaTrader Broker is alike!

There are basically 3 different types of MetaTrader brokers:

DEALING DESK - DD-Broker

In most cases, brokers who set their courses by a dealing desk offer a fixed spread. This spread is usually higher than the one that could be achieved by a direct market access. The broker earns his money from the difference between the spread with which he runs his finances through the inter-bank market and the spread which he passes on to the customers..

Dealing desk brokers are also frequently called "market makers", for the courses which the customer receives do not have much in common with the real inter-bank trading, due to the surcharge of the dealing desk. Hence, they are an artificially created market and rarely in the interest of the customer, being far too expensive. The obvious advantage of trading with MetaTrader's "free trading" is thus annihilated, because the customer will lose about 7.5 € per lot and each point of spread surcharge!

The danger with DD-brokers therefore the trading against the customer. Many DD brokers live from the losses of their customers. There are also serious DD-brokers, but plenty of black sheep are working with numerous plug-ins in order to negatively influence the performance of the customer. Stoploss fishing, re-quotes, persistent high slippage and the like are evidence of the attempted manipulation of the performance to the detriment of the trader or the trading system. However, one should not judge rashly, because a simple high slippage during a volatile phase or a re-quote during a brief spike of data does not already mean that your broker is trading against you!

Electronic Communication Network - ECN-Broker

The acronym ECN stands for Electronic Communication Network. The essential feature of an ECN broker is the flexible spread. The bids of the associated liquidity providers (banks) are posted determining the bids for the ECN broker. An ECN broker does not post his own bids through a dealing desk, but he is a kind of connection between trader and inter-bank trading.

ECN broker must also make money. Since they do not earn anything from the spread – for they do not extend spreads to their own benefit like a dealing desk, you will usually pay to an ECN broker a commission for trading. Despite the commission, trading with ECN brokers is usually much cheaper, due to the significantly lower spreads. There are also some ECN brokers who surcharge to the very low spread of the inter-bank trading a fix value of 0.2 or 0.4 points, funding their business this way. This variant is usually also much cheaper than a DD-broker.

Another advantage is the fact that an ECN-broker does not set up a counter-position against the customer positions, meaning that they might trade against their customers. An ECN-broker earns his money chiefly through commissions, he is therefore interested in profitable/long-term traders, who generate a lot of trades ans thus make a lot of turnover. Stoploss fishing and similar gadgets such as spread extension of news are (almost) not performed by ECN-brokers.

Last but not least some ECN-brokers are now offering an insight in the current market depth, i. e. the confrontation of supply and demand in subsequent course levels. This allows for trading strategies based on evaluation of the order depth.

Straight Through Processing - STP -Broker

The STP-broker is the ideal of a trader. This type of broker passes orders directly from customers to the liquidity banks, i. e. the banks in the inter-bank trading for foreign exchange market. Sometimes STP-brokers cooperate with one single bank in the inter-bank complex, others in turn work with several liquidity providers. Certainly it can be beneficial if customer orders are routed through various banks, ensuring the necessary liquidity to execute the orders and allowing higher volumes to be operated.

It is the main advantage of this type of order processing that the trader/customer more or less directly participates in the inter-bank trading. The order will accordingly be executed directly, without interference by a broker or dealing desk.

However, there are also various kinds among STP-brokers. Thus some brokers offer straight-through processing, but not at 100% of the trades. I.e. they create a mixture of STP- and DD-brokers. Small trades are rather conducted via the DD, i. e. the broker then assumes counter-position or acts as market maker. For large trades or relevant and profitable customers, however, orders are routed right to the banks of the inter-bank market. The broker thus gains his profit from unsuccessful customer trades (customer makes loss = broker makes a profit) and from the arbitrage of different spreads in the inter-bank trading.

Non Dealing Desk - NDD-Broker

The NDD-broker is either an ECN- or an STP-broker, so he has no dealing desk installed between the customer and the actual Forex-market (inter-bank market). Accordingly there are very short execution times and almost no re-quotes or other delays. The spread is not influenced by the broker, but derived directly from the quotes offered/available in the inter-bank trading.

Caution Just because a broker labels himself ECN- or STP-broker or purports to conduct his orders by this process at high speed in the interest of the customer, it does not mean that he is telling the truth! Unfortunately, there are several brokers who count on the trademark ECN or STP, but in fact still deal your trades via a dealing desk. A dealing desk may not always be negative for the customer, but if you have a broker with high spreads (e. g. EUR/USD > 2 or USD/JPY > 2), slow execution times, regular slippage, re-quotes on the TP, exploited SL, etc., then you should strongly consider a change. Meanwhile there are many excellent MetaTrader brokers, and a change is usually very fast and uncomplicated!

A very good description of the types of brokers and a large selection of brokers can be found here, among other things.