Zack and away: To buy stocks, users nowadays only have to pull out their mobile phones. Providers such as Trade Republic, Smartbroker or Justtrade have not only made investing on the floor easy – they have also made it socially acceptable again. In this way, the providers rolled out the well-divided market for investment services in a very short time: savings plans on the popular ETFs, i.e. papers that follow a stock market index one-to-one, usually no longer cost any execution fees at all. Individual purchases are sometimes also available for free – or for a symbolic euro.
Now, however, the EU Commission wants to ban one of the most important sources of income for low-cost brokers. Because in the background, many of the providers, barely noticed by most customers, collect lucrative reimbursements. If such agreements were banned, the order prices of the apps could rise faster than investors would like. the SZ reveals what investors can do now.
What exactly is it about?
It’s about nothing less than the core mechanism of many of the stock apps: They can offer low prices because it’s not just the end customer who pays. The cell phone brokers often do the much lush business with so-called rebates. The trick: when customers buy a security, the app often automatically forwards their order to special trading venues and receives a commission for it. The EU Commission and other financial supervisors have been clashing with this model for months: Do the app providers choose the trading platform with the best rates for customers – or with the highest reimbursements for the provider?
What exactly does it work when I buy a share?
For example, if a customer wants to order from Trade Republic, he searches for the security in the app. However, customers cannot choose whether the order should be executed on the Frankfurt Xetra computer exchange, the Stuttgart Stock Exchange or rather on the Munich stock exchange – this is possible with other banks. Because Trade Republic normally forwards all customer orders to the LS Exchange , the electronic trading platform of the Hamburg Stock Exchange. What only a few end customers know, however, is that all the courses there are provided by the Düsseldorf trading company Lang und Schwarz. And the trading house pays Trade Republic compensation for the fact that the app unloads masses of orders from private investors there – and suddenly there is a lot going on on the trading center again.
How much money is there?
If you want to see the amount of the reimbursement, you can click on the footnote “Cost information” immediately before placing the order. For example, if customers buy shares in the Chinese smartphone manufacturer Xiaomi via Trade Republic, 75 cents would go to Trade Republic as reimbursement. According to the provider’s customer agreement, “between one and three euros” are usually paid. The automated collection of these small amounts pays off: In the 2019/2020 financial year, Trade Republic posted a total of almost 27 million euros in commission income.
What exactly are the financial supervisors bothering them?
The EU Commission would like to abolish these reimbursements because then all exchanges would have to struggle with each other to find the best price for the same security. If special trading venues can automatically be certain of certain orders because of the contracts with share apps, the incentive to always provide the best prices could be low – so the suspicion.
So can I get bad courses through the apps?
Investors don’t have to worry much during the day. If the dominant Xetra system of Deutsche Börse is open between 9 a.m. and 5.30 p.m., the prices on the other exchanges must also be based on this – this is also stipulated in the exchange rules. The Stiftung Warentest has already examined the topic several times and bought common ETFs and large German Dax shares through Neobrokers. The result: the testers could not find any significant course deviations. Recently, a commissioned study from three universities came to the conclusion that the courses on the provider Trade Republic are normally just as good as on the dominant trading platform Xetra, in around 20 percent of the cases even better and in just under one percent worse. However, investors should be careful before 9 a.m. and after 5.30 p.m., as prices can turn out worse.
Will I have to pay more for my deposit soon?
If the EU parliamentarians actually ban reimbursements in the end, it should be more expensive. “The zero-cost brokers would have to change their entire business right away,” says Maximilian Biesenbach from the management consultancy Simon Kucher und Partner. In a paper, the price experts are already giving recommendations on how providers can tweak the fees as cleverly as possible: charge annual basic fees for the custody account, increase trading venue fees or increase foreign exchange fees. Even with today’s zero-cost brokers, prices could possibly rise. However, since the young providers have more efficient IT systems than many other banks and also employ fewer staff, they could still be the cheapest in the end.
Is the ban guaranteed to come?
No, that is not said. So far, the ban can only be found in the EU Commission’s draft regulation; the EU Parliament is due to vote on it in the first quarter of 2022. EU Finance Commissioner Mairead McGuinness has already indicated that the draft regulation could be improved. In any case, there are signs of resistance from parliamentarians: “The ban would be a disservice to small investors,” says Sven Giegold, financial policy spokesman for the Greens in the European Parliament. Because for monthly ETF savers and normal private investors, prices would probably rise.
I am a customer of a share app: do I have to take action now?
Private investors don’t need to panic, nothing has been decided yet. Until a decision is expected in the coming year, investors can take away the low prices at Neobrokers. Only when prices actually rise in the end should investors make a good comparison of terms and conditions and check whether their app is still competitive.
What if I then want to switch to another provider?
Then you just have to let the new bank know; she takes care of the correct relocation of the securities. However, savers should note that it can take up to two weeks to move their securities and that they will not be able to get their shares during this time. There can be problems for savings plan savers who push a certain amount of money to the stock market every month. If you order for only 25 euros a month, you will sometimes get “broken” shares if you cannot buy a whole ETF share for this amount. These fragments cannot be moved to a new depot provider, they have to be sold when the depot is moved – depending on the provider, this can turn into a telephone marathon. Customer service is quickly overloaded, especially with share apps. If hundreds of thousands of customers suddenly want to switch at once, there could be confusion.
When the reimbursements seem dubious to me. What to do?
It is difficult to get around it with cheap providers, after all, many cheap direct banks also collect rebates. Providers who at least can freely choose the trading venue and who also have access to the largest Xetra exchange are suitable for critical investors. This is currently possible at favorable conditions with Smartbrokers, Scalable Free Brokers and online brokers such as Onvista and Flatex – where customers can then stay in control. The Dutch low-cost broker Bux, on the other hand, does not collect any reimbursements for legal reasons and usually only charges one euro order fee. There, however, customers cannot decide for themselves on which trading venue their order will ultimately be executed. In the end, it is a personal matter of weighing up what you feel comfortable with.
Should I even trade on my phone?
It is particularly convenient for young people to quickly pull out their smartphone during the day. Nevertheless, investors should be careful what they do – after all, the stock market is not a game, it’s about your own money. Finance scientists at the Goethe University in Frankfurt have found, for example, that users are more impulsive on their mobile phones than on a normal desktop PC. In plain English: you buy lottery-like stocks more often, which are riskier. Here, investors should not be misled by the convenient user interface of many cheap brokers – and stay true to their long-term, solid and well-diversified investment strategy.