WHU General

Lower Fees with Neobrokers

A recent study, co-authored by WHU, attests to more favorable transactions on the stock exchange

In the past two years in particular, the number of retail investors has increased significantly: in Germany alone in 2020, 2.7 million more people were invested in shares, equity funds or exchange traded funds (ETFs) than in 2019. Along with retail investors, the number of so-called neobrokers has also increased. They represent a new generation of online brokers separate from traditional banks and advertise that they offer their customers trading at almost zero cost. One of these neobrokers is Trade Republic. A study has now been commissioned by the trading platform to compare how cheap or expensive trading with Trade Republic is as compared to the reference market Xetra, the most significant German stock exchange.

The study was conducted by Professor Lutz Johanning of WHU - Otto Beisheim School of Management in cooperation with Professor Steffen Meyer and Dr. Charline Uhr of the University of Southern Denmark and Danish Finance Institute respectively. The study examined the implicit costs (order execution costs) and explicit costs (direct fee for using the online broker) of over two million transactions on the stock exchange. The results show that Trade Republic users had a price advantage of 52 cents per 1,000 euro order on average. The spread, i.e., the difference between the buying and selling price of an asset, is on average almost 43 percent better than that of the main German stock exchange XETRA.

Neobrokers have received criticism in the past as there was a suspicion that they would not have the customer's respective buy order executed at the most favorable trading venue, but rather where they received the highest reimbursement from the trading venues. Since neobrokers charge little to no fees to their customers when trading, they are predominantly financed by the reimbursement they receive from the respective trading venues to which they have passed on the customers' orders (payment for order flow or PFOF). Plans by the EU Commission are currently underway to ban PFOF altogether as part of the revision of the so-called Markets in Financial Instruments Directive (Mifid). Critics argue that such a ban would distort competition between trading venues to the detriment of investors. The extensive data resulting from this study makes it clear that, at least in the case of Trade Republic, neobrokers do indeed act in the interest of their customers and on average even offer better conditions than the Xetra stock exchange.

Literature reference and methodology

For the study "Private investors and the emergence of neo-brokers: Does payment for order flow harm private investors?" the implicit and explicit costs when trading assets of 100,000 randomly selected Trade Republic customers who had opened their accounts with the broker before July 2020 were evaluated. 2.2 million of their transactions via the Trade Republic portal were examined in relation to the costs which would have been incurred by trading on the Xetra stock exchange.

- Meyer, S./Uhr, C./Johanning, L. (2021): Private investors and the emergence of neo-brokers: Does payment for order flow harm private investors?