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Stock trading for free?


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Competition for customers when buying funds and shares is getting tougher. Discount providers and “neobrokers” are competing with branch banks for orders. Consumers should check the offers.

Andreas Braun

A new breed of young banks and brokers is facing tough competition from the house banks and discount brokers who have been offering the purchase and sale of shares and fund units for around two decades.

The “neobrokers” have only been trying to take over the market for a few years. They include providers such as Trade Republic, Scalable Capital, Justtrade and Smartbroker. The young generation of fund and share savers in particular trade using the trading apps of the new generation of financial companies primarily via their smartphones.

Few staff, lots of technology

In addition to the playful convenience of trading on the stock exchange, the trading conditions of neobrokers are also causing a sensation. While a branch bank still charges fees of up to one percent of the purchase value when buying funds, consumers can get by with discount brokers such as Comdirect or Consorsbank for around a quarter of the costs. But neobrokers only charge a symbolic fee of one euro – or the trade is even carried out completely free of charge. There are no custody fees anyway.

Few staff, no advice for customers: This ensures a cost advantage over the established competition. Then there is the technology factor, as Markus Jordan explains, who compared conditions for the ETF consumer portal extraETF: “The neobrokers have the huge advantage that the software they use to process military paper transactions is state-of-the-art and therefore very efficient. And thanks to these new software systems, neobrokers can offer very favorable conditions.”

Trading often via partner banks

Neobrokers usually work with a partner bank that stores the purchased shares or fund units in a securities depository. They are monitored by the German regulatory authority BaFin, just like the usual providers of securities transactions. The usual statutory deposit protection of up to 100,000 euros per account and customer applies to deposits in the accounts. In the event of bankruptcy, this protection kicks in. And shares or funds are legally protected special assets anyway. They are therefore only managed in trust by the broker's partner bank.

Around half a dozen neobrokers with a license from the German financial regulator BaFin are now available. The number of customers is constantly growing. According to current information, the German market leader Trade Republic has already broken the 2.5 million user mark in Germany this year.

Main source of income: Refunds

The most important source of income for neobrokers is currently the rebates they receive for bringing orders to certain trading venues. This also includes direct trading via partner banks. This is also known as “Payment for Order Flow” (PFOF).

The rapid growth has also had negative side effects, especially at Trade Republic, in recent years. In 2021, the company's partner, the trading house Lang & Schwarz, could no longer handle a high number of orders for the US stock Gamestop. Customer complaints piled up. A few weeks ago there was another flood of complaints because, according to customers, Trade Republic had not paid out dividends quickly or had not calculated taxes correctly. Company boss Christian Hecker then announced an expansion of customer service.

report about Service problems

This is not an isolated case in the industry, as Ralph Kummer from the Federal Association of Consumer Organizations reports: “Consumers repeatedly report to us about service problems with neobrokers. This means that inquiries are sometimes not answered at all or only inadequately. At best, you might get an answer from chatbots, but it doesn't really fit the issue.”

Neobrokers also attract the attention of observers with their rather aggressive marketing campaigns. A new fund product in an exciting industry is being touted as the latest trending stock that you should get into right away. “To put it simply, it is of great interest to neobrokers if their customers trade as much as possible,” says Kummer, “the more transactions, the better for them.” Many trades simply mean higher revenues.

Anyone who wants to build up their portfolio with a neobroker should also keep a few other factors in mind. Although the trading costs are unrivalled low with the providers, not every fund or index fund (ETF) is available from all brokers. In addition, there are restrictions on the trading venues: Due to the close ties to partner banks or trading venues, the Deutsche Börse's Xetra trading venue, for example, is not always available. This can mean that the current prices of securities when buying and selling are somewhat less favorable, particularly during off-peak times in the early morning and in the evening.

New Sources of income wanted

Only a few of the new industry representatives offer a daily money or checking account or even a credit card in addition to the broker account. However, this is likely to change in the coming years. The neobrokers are looking for additional sources of income and are increasingly becoming “full-service” competitors to the house banks and also to discount brokers.

The reason for this is also that the most important source of income to date, the rebates from partner companies, is likely to dry up soon. The EU wants to ban the “payment for order flow” system from 2026. Some of the neobrokers have already stated that they want to continue to offer trading at very low prices or even for free. Whether they can do this depends on whether they can continue to win new customers so quickly and whether the business can be geared towards growth.

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