Things are getting serious for the so-called neo brokers.

They call themselves Trade Republic or justTRADE and have revolutionized stock exchange trading in this country.

They allow you to trade on your mobile phone, and at the same time cheaper than the conventional competition: a so-called trade often only costs one euro.

During the corona pandemic, numerous people discovered the neobrokers for themselves.

You pushed the equity culture.

Werner Mussler

Business correspondent in Brussels.

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Franz Nestler

Editor in business.

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European politicians have long viewed the business model of these neo brokers with skepticism.

The mistrust is based above all on consumer protection considerations: there is a risk that the generally young users will see their investment via neobrokers as a game of chance or computer game and are encouraged to gamble - all the more so since the providers tell their customers too little about the risks of their business model informed.

In early summer, MEPs therefore welcomed the fact that the EU Commission wants to regulate the industry more closely.

Complete ban envisaged

But now that an amendment to the relevant financial market regulation (MiFIR) is imminent, the EU Parliament is criticizing the EU Commission's plans because they went too far. In the proposal that EU financial market commissioner Mairead McGuinness wants to present this Thursday, a complete ban on the so-called "Payment for Order Flow" is foreseen. That sounds very technical at first, but if the proposal prevails, it can completely change stock trading - not just for neobrokers, but for the entire industry. Quite simply, one could say: The providers only offer products with which they can earn money themselves.

But let's start at the beginning: Payment for Order Flow (PFOF) is a relatively new development. In the past, the orders were forwarded by the broker to an exchange. That was expensive because there was a commission for the bank, for the broker, and for the stock market. Direct trading came up more than ten years ago: the order was then processed through a partner of the broker. These partners no longer allowed themselves to be paid for it, but even paid the broker for it. They can afford that because they earn money in other ways.

This made completely new business models possible.

The customer does not notice anything, the process runs completely in the background.

Specifically, it works like this: The neobroker makes the customers' transactions available to a so-called market maker.

He has it, mediates customers and salespeople and brings both together.

The market maker pays the neobroker a commission for the transaction.

This is best seen in the example of Trade Republic.

The neobroker is likely to have turned over up to 100 million euros in the 2020/2021 financial year.

More than half of that comes from these PFOF stores.

For this purpose, Trade Republic works with the trading platform LS Exchange or, if you buy certificates, HSBC Trinkaus.

ETFs could also be affected

If you turn up your nose, let me tell you: In principle, almost all banks do that, the neobrokers just turn the whole thing a little further.

A PFOF ban could seriously affect their business model, but Comdirect or an ING-DiBa also receive such fees.

But they would rather benefit from a PFOF ban, as the price pressure fueled by the neo brokers would ease.

Ultimately, even ETF savings plans could be affected, which are often financed through rebates.

If the issue also affected portfolio commissions, branch banks and even insurance companies would also be affected.

After all, Article 39a of the EU Commission's 42-page draft states that the PFOF ban applies to “every third-party provider”, i.e. not only affects neobrokers.