New EU rules for neobrokers: Will stock trading soon become more expensive?

Buying shares via smartphone, almost free of charge – that is the business model of the so-called neobrokers. The EU Parliament has now banned the principle behind it. What does this mean for investors?

Erik Podzuweit and Christian Hecker are competitors – they are responsible for the fortunes of the two largest German neobrokers: Hecker heads Trade Republic, Podzuweit is head of Scalable Capital. But now the two entrepreneurs share a problem. The EU Parliament has banned a model that is essential for neobrokers. It’s called: “Payment for Order Flow”.

The following principle lies behind this: the neobrokers route their customers’ orders to specific trading venues and receive a refund from the stock exchanges. Customers then pay only a very low fee or no fee at all for trading stocks or funds. According to the wishes of the European Union, this model should end in 2026.

“Huge success for monopoly exchanges”

“The ban on payment for order flow is a huge success for the monopoly exchanges,” criticizes Christian Hecker from Trade Republic. “They want to keep consumer-friendly, cheap and simple competition at bay and have now achieved a milestone in this direction in Brussels.”

Erik Podzuweit from Scalable Capital calls the ban on “Payment for Order Flow” a nasty surprise. He also sees this as a lobbying success for the major European stock exchanges, for example in France: “They are losing business as a result of this ‘Payment for Order Flow’ because small investors do not trade on these large stock exchanges. The prices there are very good, but… Additional fees are far too high. Instead, they trade in Germany on specialized exchanges for small investors.”

The federal government is also critical of a ban on the business model. According to the FDP-led Federal Ministry of Finance, they spoke out against this in the negotiations at EU level, but were isolated with this attitude.

BaFin judged smaller trades to be fair

So where is the criticism of the principle? Andreas Hackethal, finance professor at the University of Frankfurt, points out the fear that neobrokers do not choose the trading venue that offers the best conditions for their customers, but rather the one that pays the highest fees.

“But you also have to say that all brokers have long been obliged to always and always guarantee their customers the best possible execution of trades,” says Hackethal. “And BaFin had actually checked the conditions at neobrokers and judged them to be fair, especially for smaller trades.”

So what changes with the ban on “Payment for Order Flow”? Initially little for the customers of neobrokers in Germany. Providers still have until 2026 to respond to the new rules. Then the transition phase ends.

“Doesn’t change anything more fundamental Attractiveness”

Christian Hecker from Trade Republik promises that customers will continue to be able to save on exchange-traded funds – ETFs for short – free of charge. Erik Podzuweit from Scalable Capital also wants to keep prices low. We continue to rely on a technological advantage over traditional banks – and not only that: “The other aspect is to diversify our sources of income. That means earning even more through a monthly membership fee, through interest margins – in other words, to diversify the business in order to to continue to offer a very competitive price.”

Finance professor Hackethal assumes that the neobrokers will find ways to compensate for the losses from the ban on “Payment for Order Flow”. Providers could continue to score points with fast and simple apps and, more recently, with high interest rates. “Perhaps every trade will end up being a little more expensive than it is today – but that doesn’t change the fundamental attractiveness of the business model for customers.”