Frankfurt Stock exchange trading almost free of charge: That should soon be history. The EU states and the EU Parliament have agreed on a ban on “Payment for Order Flow” (PFOF). Parliament and Council have yet to adopt the decision, but this is considered a formality.
The ban on PFOF puts neobrokers “under stress,” says Max Flötotto, who heads McKinsey’s banking advisory services in Germany and Austria. Dominik Nittner from the management consultancy Arthur D. Little also says: “The PFOF ban primarily affects new brokers, because price increases are inevitable.”
PFOF refers to reimbursements that local neobrokers Trade Republic or Scalable Capital receive from their trading partners for forwarding millions of customer orders on their platform.
A PFOF ban has been hotly debated for a long time – and caused a stir in the industry. The EU Commission had already wanted to ban the controversial fee model in November 2021, but then postponed the decision.
The effects of PFOF have been analyzed in numerous studies in the past – including by the German financial regulator Bafin. Their result: In the case of orders with smaller volumes, investors would usually have done better, taking transaction costs into account, than in the case of direct purchases or sales on the stock exchange.
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“However, with higher transaction volumes and lower liquidity in the reference markets at the time of order execution, these advantages were lost. The results do not show whether PFOF was the cause of the differences found,” the Bafin statement said.
Critics fear that neo-brokers will not forward customer orders to the trading venues that offer the best prices, but to those with the highest rebates.
Neobrokers often work together with a stock exchange. Trading in shares at Trade Republic takes place via the Lang & Schwarz Exchange, an electronic trading system operated by the Hamburg Stock Exchange. Scalable Capital often uses the Gettex stock exchange in Munich.
Neobrokers can offer significantly lower prices
However, the fee model also ensured that market leaders such as Trade Republic, which claims to have over one million customers, and Scalable, with over 600,000 customers, can offer customers such low prices.
Trade Republic, for example, only charges a flat fee for third-party costs of one euro per trade from its customers. Scalable Capital charges an order fee of EUR 0.99 for each transaction. The Munich broker also has a subscription model from EUR 2.99, with which customers do not have to pay any additional fees per trade.
For comparison: With the listed Frankfurt broker Flatex, investors trade for a flat rate of EUR 5.90 per order. Xetra, a trading platform of Deutsche Börse, also incurs several euros in fees per order.
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Not surprisingly, larger stock exchanges such as Deutsche Börse or Euronext welcome the PFOF ban. “Payment for order flow never existed on Xetra and the Frankfurt Stock Exchange. However, the decision is relevant for us insofar as it strengthens competition among European stock exchanges,” said Deutsche Börse. Euronext said the PFOF ban would protect retail investors from conflicts of interest.
Larger stock exchanges would now try to advertise with price transparency in the future and thus gain market share, says consultant Nittner.
The agreement is part of the revision of the Markets in Financial Instruments Regulation (MiFIR) and the second Markets in Financial Instruments Directive (MiFID II). It enables member states that do not yet have a PFOF ban – such as Germany – to grant their market participants an exemption for the time being. However, this option will expire on June 30, 2026, when the ban will apply everywhere.
Business models are adjusted
Neobrokers will therefore have to adjust their business models over the next three years. The past few months have already shown that companies are already driving this forward. For one, Trade Republic and Scalable launched an interest rate offering. According to Nittner, “a clever move” to attract more customers. On the other hand, there are also subscription models like Scalable.
A ban would eliminate competition among trading venues, which clearly benefits investors, and lead to higher costs. Trade Republic co-founder Christian Hecker 2021
That is why the local neobrokers are also combative. “Trade Republic will continue to offer the best offer on the European market – even in 2026,” says Trade Republic co-founder Christian Hecker.
He had already expressed his opinion on a PFOF ban in an interview with the Handelsblatt in November 2021. “A ban would eliminate competition among trading venues, which clearly benefits investors, and lead to higher costs,” he said at the time.
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Scalable Capital also finds the EU decision wrong. “It is not in line with the Commission’s goals of creating new opportunities for savers and investors, but primarily serves those players who want to reduce competition on the capital markets and secure their existence with high fees,” said a company spokeswoman.
The neo-broker expects that the PFOF ban will lead to “increasing costs” for many investors. “However, we will do everything we can to continue to provide the cheapest and best offer for savers and investors,” Scalabe continued. Nothing will change for customers in Germany for the time being.
Experts continue to believe in the success of neo-brokers
The experts Nittner and Flötotto continue to see neobrokers as major competition for traditional banks: “Neobrokers are much leaner, have a better user experience – and can very likely still make a cheaper offer to the customer even with price increases,” says Nittner . In addition, neo-brokers not only make money exclusively from PFOF, but also demand a flat-rate fee for third-party costs or order fees.
Flötotto also believes that Neobroker will continue to be successful with their concept of simplifying access to securities trading and offering customers an attractive user interface. “But the monetization of the model needs to change,” he said.
However, Flötotto does not expect that customers will face permanently higher costs due to the PFOF ban. “It doesn’t matter where the fees are collected in the end,” says the McKinsey consultant. Banks and brokers would always have to try to make money somewhere else, otherwise they would not offer securities trading.
In a transitional phase, there may be higher costs for individual customer groups, says Flötotto. In the medium to long term, however, he does not expect any massive changes. “The overall trend is that costs for investors have fallen sharply in recent years.” Nothing will fundamentally change about that.
More: Bafin issues fee model for online brokers mixed testimony.