The cumbersome English term "payment for order flow" contains explosives.

Should the EU Commission prevail and ban the controversial remuneration practice of digitally operating brokers, they would be – at least partially – deprived of their business model.

In Brussels they have consumer protection in mind.

Meanwhile, digital investment platform Scalable Capital claims that Brussels officials are doing retail investors a disservice.

The Munich-based company cites its own study as proof.

"Payment for order flow" means in practice that brokers receive rebates from their trading partners when they cobble orders to them for settlement.

In return, they can charge their customers significantly lower fees than traditional banks.

What sounds like a win-win situation for everyone involved is nevertheless a thorn in the side of the EU Commission.

She fears that brokers will send orders to be processed where they get the highest rebates, rather than where private investors get the best price.

“Above all, I believe that this payment model is not consumer-friendly.

We can't leave it unregulated, that's very clear," said EU Financial Markets Commissioner Mairead McGuinness in an interview with the FAZ last November.

150 most traded financial instruments examined

That's not true, says the digital investment platform Scalable Capital, backing up its view with a six-month study.

It shows that private investors trade significantly more cheaply on so-called retail exchanges that are tailored to their needs than on institutional trading venues.

According to its own statements, Scalable Capital compared 3.7 million data points from two stock exchanges, Xetra and the Frankfurt Stock Exchange with its specialist trading, which is used primarily by institutional investors, with the Tradegate and Gettex stock exchanges, which specialize in private investors, a trading model of the stock exchange Munich.

According to Scalable, the 150 most traded financial instruments were examined, 86 individual stocks and 64 ETFs.

Order volumes between 500 and 5000 euros were accepted,

Anyone who trades Volkswagen shares for EUR 5,000 pays EUR 1.71 on the stock exchange for private investors and EUR 5.99 on the institutional trading venues.

The range of prices was taken into account, as were all other costs of the trading orders.

Dirk Urmoneit, Scalable's chief strategy officer, explains the difference not only with the "Payment for Order Flow" payments.

The fee models of the institutional trading venues are also tailored to the needs of the target group, but are “rather unfortunate” for private investors with low trading volumes.

In addition, clearing is cheaper for neo-brokers.

"The empirical analysis presented here provides clear and compelling evidence that competition and arbitrage work across institutional and private exchanges and ensure efficient and synchronous pricing between exchanges," the study concludes.

For Erik Podzuweit, co-founder and co-head of Scalable, the results presented allow only two conclusions: retail investors “achieve the best possible result when they trade on retail exchanges via neobrokers”.

And: “Consumers are better off with payments that brokers demand from market makers on behalf of their customers, the payment for order flows.” The study nevertheless has a didactic disadvantage, as Scalable Capital concedes: only orders flow into it within the Xetra trading hours.

Then the spreads,

i.e. the spread between the purchase and sale price of a security, comparable at all trading venues.

However, this is not the case in the early morning and in the evening.

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