The Shift in Securities Trading: EU's PFOF Ban and the Rise of Fee-Free Platforms
By Thomas Spengler, Stuttgart
Neobrokers face increased pressure due to the implementation of the kickback ban.
The arrival of the European Investor Exchange (EIX) by Scalable Capital signals a seismic shift in the securities trading industry. The catalysts of this transformation are the impending end of Payments for Order Flow (PFOF) and the burgeoning of zero-fee trading platforms, colloquially known as Neo-exchange trading platforms.
For some time now, a noticeable shift in securities trading volumes from traditional exchanges with fee-based models to largely fee-free platforms, referred to as Neo-exchanges, has been on the rise. The speed of this transition accelerated with the market entry of Neo-brokers such as Trade Republic and Scalable with their zero-fee platforms in 2015. Another pressure factor is mounting with the EU's decision to ban PFOF by mid-2026, already in effect in several European regions.
As the business model of online brokers, particularly Neo-brokers, heavily relies on the kickback revenues they receive from market makers for their order flow, they are left to respond swiftly. "They're essentially backed into a corner," explains Karsten Haesen, CEO of Tradegate AG Wertpapierhandelsbank in Berlin.
Viable Business Models
Both traditional market makers like Tradegate and Neo-brokers like Scalable Capital have developed innovative business models in response to the anticipated PFOF ban. The Berlin-based company offers Tradegate.direct, an app allowing clients to trade directly without intermediaries. Conversely, Scalable Capital, as both an intermediary (OFP) and a Neo-broker, is building market maker expertise and thus internalizing the source of kickbacks. The challenge now lies in whether Scalable can generate profits from market making at trading venues. "It's not a walk in the park, but it's feasible given our experienced team," states Dirk Urmoneit, Chief Strategy Officer (CSO) of Scalable.
Reshaping Securities Trading
Simultaneously, Scalable Capital is developing its own exchange with the EIX, offering a monthly flat fee of 4.99 euros and featuring trading surveillance provided by the Hanover Stock Exchange. Both models share a common thread: Tradegate and Scalable are expanding their value chain by integrating functions previously handled by specialized institutions. "If both models succeed, it will represent a fundamental change in securities trading," a prominent stock exchange official believes.
The impact on market makers was demonstrated by Baader Bank's share price decline following the announcement from OFP Scalable that it would act as a market maker and take over custody services from Baader by the end of 2025. It is also expected that Scalable will route its orders to the detriment of Gettex in favor of the new EIX.
A New Revenue Stream
With PFOF revenue drying up, someone will have to bear the cost of maintaining the zero-fee exchange model. Increasing the spread is considered infeasible in the market, with Urmoneit anticipating a further reduction in the forex spread due to increased competition. Observers expect fee increases not only in trading but also in other areas such as deposit and custody services offered by neo-brokers. "Thinkable are fee-based packages specifically tailored to services outside of securities trading," Haesen explains. However, the question remains whether customers will accept a significant increase in fees.
Surprising Trading Volumes
Tradegate, which launched Tradegate.direct as an OFP in June, has already garnered some initial insights. "The number of trades per customer exceeds our assumptions," Haesen explains. Even the asset universe of over 10,000 securities from the stock, ETP, and mini-futures classes seems insufficient for customers.
Risks for Tradegate
The further development of Tradegate.direct is not without risks for Tradegate, as its success relies heavily on the previously established OFPs, some of which reportedly dislike the newcomer. There are said to be providers that have Tradegate listed at the top of their execution lists and are now contemplating changing this practice. Haesen, however, does not view Tradegate.direct as direct competition to other OFPs, but as another provider striving to earn its customer base.
Extending the Value Chain
Scalable has been working on expanding its value chain for two years, submitting an application for a license to accept deposits to enable deposit services in addition to custody services in the future.
Awaiting Industry Reactions
Urmoneit sees significant cost-saving potential in Scalable's new market-making due to its size (with around one million customers). He anticipates "a relevant flow of orders" from Scalable's customers to be executed at the new EIX, which became operational on December 8, 2024. Smaller competitors may face disadvantages here, Urmoneit estimates. Meanwhile, the EIX, where MWB Fairtrade is also active as a market maker, welcomes additional online brokers as market participants. Now that Tradegate and Scalable have demonstrated their vision of a life without PFOF, the industry awaits the response of other market players, particularly Trade Republic and market maker Lang & Schwarz, to the PFOF ban.
Enrichment Data:
Overall:The EU's ban on Payment for Order Flow (PFOF) under MiFIR reforms[1] will necessitate significant operational and revenue model adjustments for neo-brokers like Trade Republic and Scalable Capital, particularly given their reliance on PFOF for commission-free trading. The anticipated impacts and likely strategies include:
Key Impacts:- Revenue Model Disruption: PFOF has been a mainstay revenue source for neo-brokers offering commission-free trading. Its prohibition eliminates a key income stream, forcing firms to find alternative monetization methods[1][2].- Market Structure Changes: Without PFOF, order flow fragmentation may decrease, potentially improving price discovery but reducing liquidity from wholesalers[2][4].- Compliance Costs: Neo-brokers will need to overhaul their execution practices to avoid conflicts of interest, ensuring compliance with the "best execution" mandate under MiFID II[3][4].
Strategies for Neo-Brokers:1. Subscription-Based Pricing: Transitioning to tiered subscription models (e.g., premium accounts with advanced analytics or lower forex spreads) could replace lost PFOF revenue.2. Auxiliary Services: Expanding into wealth management, tax optimization tools, or crypto trading to diversify income.3. Order Flow Reconfiguration: - Direct Market Access: Routing orders to lit exchanges or multilateral trading facilities instead of wholesalers, potentially raising execution costs[2]. - Hybrid Routing: Combining price-improvement auctions with lit exchange orders to balance cost and execution quality.4. Geographic Expansion: Targeting jurisdictions where PFOF remains legal (e.g., Germany temporarily allows it until national legislation finalizes[3], though this is transitional).5. Cost Reduction: Automating compliance and execution processes to offset reduced margins.
Challenges Ahead:- Profitability Pressures: PFOF's high-margin revenue (with wholesalers reporting Sharpe ratios as high as 17[2]) will be difficult to replace, risking margin compression.- Client Retention: Introducing fees or subscription tiers may alienate cost-sensitive retail investors accustomed to zero-commission trading[2][4].
Brokers that adapt swiftly with transparent pricing and value-added services are likely to retain market share, while slower movers could face consolidation or exit.
- In response to the EU's ban on Payments for Order Flow (PFOF), both traditional market makers like Tradegate and Neo-brokers like Scalable Capital have devised innovative business models.
- Tradegate offers Tradegate.direct, an app that allows clients to trade directly without intermediaries, while Scalable Capital, acting as an intermediary and Neo-broker, is building market maker expertise to internalize kickbacks.
- With the anticipated PFOF ban by mid-2026, viability will depend on these companies' ability to generate profits from market making at trading venues.
- As the business model of online brokers heavily relies on kickback revenues, they are left to respond swiftly to the changes in the securities trading industry, particularly with the rise of fee-free platforms, referred to as Neo-exchanges, by 2025.
