D.The cumbersome English term “payment for order flow” contains explosives. If the European Commission were to prevail and ban the controversial practice of remunerating brokers who operate digitally, they would be – at least in part – deprived of their business model. In Brussels they have consumer protection in mind. Meanwhile, digital investment platform Scalable Capital says Brussels officials are doing retail investors a disservice. The Munich-based company cites its own study as proof.
“Payment per order flow” basically means that brokers receive discounts from their trading partners when they combine their orders for settlement. In return, they can charge their customers significantly lower fees than traditional banks.
What sounds like a win-win situation for all involved is still a thorn in the side of the European Commission. He fears that brokers will send orders for processing where they get the highest discounts, rather than where private investors get the best price. “Above all, I believe that this payment model is not consumer-friendly. We cannot leave it unregulated, that is very clear, “European Commissioner for Financial Markets Mairead McGuinness said in an interview with FAZ last November.
150 most traded financial instruments examined
Not true, says the digital investment platform Scalable Capital and confirms its opinion with a semi-annual study. It shows that private investors trade at a significantly lower price on so-called retail exchanges tailored to their needs than 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 specialized trading, mainly used by institutional investors, with the Tradegate and Gettex exchanges, which specialize in investors. private individuals, a trading model of the Munich stock exchange. According to Scalable, the 150 most traded financial instruments, 86 individual stocks and 64 ETFs were examined. Order volumes of between 500 and 5000 euros have been assumed to reflect the daily reality of private investors.
Anyone who trades Volkswagen shares for € 5,000 pays € 1.71 on the stock exchange for private investors and € 5.99 on institutional trading venues. The price range was taken into consideration, as well as all other costs of the trade orders.
Dirk Urmoneit, Scalable’s chief strategy officer, explains the difference not only with “Payment for Order Flow” payments. The commission models of 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, compensation is cheaper for neo-brokers.
“The empirical analysis presented here provides clear and compelling evidence that competition and arbitrage work between 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 for only two conclusions: retail investors “achieve the best possible result when trading on retail exchanges through neobroker”. And: “Consumers are better off with the payments that brokers request from market makers on behalf of their clients, the payment for order flows.” hours. So the spreads, or the interval between the purchase and sale price of a security, are comparable across all trading venues. However, this is not the case in the early morning and evening.