Mini fees are history
“Ban jeopardizes the business model of neo-brokers”
07/08/2023 12:29 p.m
An order with neo-brokers such as Trade Republic or Scalable has so far only cost 0.99 euros, a fraction of what is due with the competition. This is made possible by the Payment for Order Flow (PFOF) fee model. Brokers receive money from stock exchange operators for forwarding their customer orders to certain stock exchanges for execution. But that could soon be over.
The attractive conditions of neobrokers could soon be history. The EU wants to ban the so-called Payment for Order Flow (PFOF) fee model. How come?
Margarethe Honisch: The EU justifies its ban by saying that the model is non-transparent. With a classic broker, customers who want to buy a share have various trading venues to choose from. You can view the buy and sell rate and choose the trading venue with the best rate. This is not possible with Trade Republic and Scalable. The shareholders are tied to a trading venue. Brussels also complains: Neobrokers tempt people to trade thoughtlessly.
Are the allegations justified?
Margarethe Honisch is a founder, investor and financial columnist. In 2017 she launched the financial platform Fortunalista to help women achieve their financial goals.
(Photo: picture alliance/dpa/Margarethe Honisch)
At least it cannot be completely dismissed out of hand. Especially at Gamestop we saw that people bought these hype stocks without any rhyme or reason. However, the question now is: Can this be blamed on the neobrokers? 23 years ago, before the dot-com bubble burst, people also invested in all sorts of stocks that had “.com” behind them. I still think the EU ban is flimsy. It is also not very plausible because the majority of young investors invest in equity funds and not in individual stocks. In addition, studies by the financial regulator Bafin on the impact of PFOF do not support the EU’s allegations.
What did the Bafin find out?
The Bafin recently examined 30 percent of the transactions in Germany and came to the conclusion that execution with PFOF was predominantly advantageous for customer orders with smaller volumes. There were only disadvantages with high transaction volumes and low liquidity. And in the case of the latter, it is not even known whether the cause lies with the PFOF at all.
Who has benefited from the model so far?
Both the neo-brokers and the investors themselves. The business model of Trade Republic, Scalable and Co. is based on the PFOF, they financed themselves with it and managed to scale up. Most young people nowadays use neobrokers when they want to invest their money. They also clearly benefited from the low-threshold offer.
And what does a ban mean for the provider’s business model?
Basically, one has to state: The PFOF ban endangers the business model of neo-brokers. However, if you look at how the providers are now positioned, it becomes clear that both Trade Republic and Scalable have made intensive use of the high interest rates in the past and passed them on to their customers. Scalable Capital, for example, now has a subscription model and both brokers also earn money through the increased interest rates.
Which investors will be hit hardest by the ban?
With the ban, the EU is depriving young people whose pension is not secure and women, who are increasingly affected by poverty in old age, the opportunity to secure themselves. Among the under-29s, the number of shareholders increased by 40 percent from 2021 to 2022. In addition, more women than men went public last year. If we prefer to protect those who juggle five-figure sums, we lose sight of small investors.
Market observers assume that the major stock exchanges have created an atmosphere against PFOF because the neo-brokers have become serious competition for them.
I can already imagine that lobby work is behind it. The data situation alone does not justify a ban.
Can neobrokers still compete with traditional traders after the ban?
The difference between a classic broker and a neo-broker is no longer that big if you ignore the choice of trading venue. Despite the PFOF ban, the customers of Trade Republic, Scalable and Co. will not turn their backs on the neo-brokers. They have created an offer and a structure that makes it possible to invest in the stock market with a small budget. This is not yet possible with many classic brokers. The ban puts off people who are new to the stock market. Those who are already investing will not be compelled to switch brokers. Ideally, they have already noticed that these fees will also be put into perspective at some point.
What would have been a more appropriate measure?
Instead of banning the fee model across the board, it would have made more sense to take a closer look at: Who does the ban disadvantage at all?
Juliane Kipper spoke to Margarethe Honisch