Dhe unwieldy English term “payment for order flow” contains explosives. If the European Commission were to prevail and ban the controversial practice of remunerating brokers operating digitally, they would – at least partially – be deprived of their business model. In Brussels, we think of consumer protection. Meanwhile, digital investment platform Scalable Capital says Brussels officials are doing retail investors a disservice. The Munich-based company cites its own study as evidence.
“Order flow payment” means in practice that brokers receive rebates from their trading partners when they submit orders to them for settlement. In return, they can charge their customers significantly lower fees than traditional banks.
What looks like a win-win situation for all parties involved is nevertheless a thorn in the side of the European Commission. She worries that brokers are sending orders to be processed where they get the highest rebates, rather than where retail 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,” EU Financial Markets Commissioner Mairead McGuinness said in an interview with FAZ last November.
150 Most Traded Financial Instruments Reviewed
That’s not true, says digital investment platform Scalable Capital and backs up its view with a six-month study. It shows that private investors trade significantly cheaper on so-called retail exchanges tailored to their needs than on institutional trading platforms. According to its own statements, Scalable Capital compared 3.7 million data points from two exchanges, Xetra and the Frankfurt Stock Exchange with its specialized trading, which is mainly used by institutional investors, with the Tradegate and Gettex exchanges, which specialize in private investors. , a trading model of the Munich Stock Exchange. According to Scalable, the 150 most traded financial instruments were examined, 86 individual stocks and 64 ETFs. Order volumes between 500 and 5000 euros have been taken into account in order to reflect the daily reality of private investors.
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 institutional exchanges. The price range was taken into account, as well as all other trading order costs.
Dirk Urmoneit, Chief Strategy Officer of Scalable, explains the difference not only with “Payment for order flow” payments. The fee models of institutional trading platforms 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 new brokers.
“The empirical analysis presented here provides clear and compelling evidence that competition and arbitrage work on institutional and private exchanges and ensure efficient and synchronous pricing across exchanges,” the study concludes. For Erik Podzuweit, co-founder and co-manager of Scalable, the results presented allow only two conclusions: retail investors “obtain the best possible result when trading on retail exchanges via neobrokers”. And: “Consumers are better off with payments that brokers demand from market makers on behalf of their clients, order flow payment. The study nevertheless has a didactic drawback, as Scalable Capital concedes: only orders pass through it within Xetra trading. hours. Then, the spreads, that is to say the range between the purchase price and the sale price of a security, are comparable on all trading platforms. However, this is not the case in the early morning and evening.