2023-06-30 15:30:29
The EU is changing the rules for stock exchange trading and is having a significant impact on the business model of neo-brokers. On Thursday evening, the negotiators of the member states and the European Parliament agreed on a far-reaching revision of the regulation and the directive on markets in financial instruments (MiFIR/ MiFiD II). This preliminary compromise now has to be approved by the parliamentary plenum and the EU finance ministers, which is usually a formality. The two laws are aimed at all providers of investment services in the EU.
One important change in particular was very controversial when the EU Commission proposed it in November because it practically bans the neo-broker fee model. This so-called Payment For Order Flow (PFOF) is now actually to be banned. However, the Commission proposal has been slightly modified: in countries like Germany, where the model already exists, investment firms can be exempted from the ban for a transitional period until June 2026.
PFOF means that the forwarding of customer orders by brokers to certain exchanges can be remunerated by them. This fee model gained importance with the emergence of direct trading about ten years ago. Before that, the orders were forwarded by the broker to an exchange. This resulted in three commissions: for the bank, for the broker and for the stock exchange. In direct trading, the order is processed via a partner of the broker. The partners, so-called market makers, pay (payment) the broker for receiving the securities orders from him (for order flow). The core of the new business model is that the neobroker makes the customer’s transactions available to the market maker. This has it, mediates customers and sellers and brings both together. The market maker pays the neobroker a commission for the transaction.
Scalable Capital is disappointed
The business model was criticized and thus targeted by the EU Commission because it evoked the risk of conflicts of interest. Brokers could route customer orders not to where it would be best in the interests of their customers, but to where they collect the highest commissions. Financial Markets Commissioner Mairead McGuinness said when presenting her proposal for the PFOF ban in the FAZ that she did not want to abolish the neo-brokers, but to regulate the fee model. “Because there is a risk that the providers will not sell the best products for the customers, but the most lucrative products for them” (FAZ of November 26, 2021).
Providers such as Scalable Capital are disappointed by the decision: “In our view, the decision made yesterday in the trialogue is the wrong one,” says the Munich-based fintech with more than 600,000 customers. “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.” Scalable expects that a Ban on paying for trading orders to be forwarded will lead to increasing costs for many investors. “But we will do everything we can to continue to provide the cheapest and best offer for savers and investors,” says Scalable. For the time being, nothing will change for customers.
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