Who is winning the race to be the European Robinhood?

There is a Robinhood-sized gap in the market for low-cost trading platforms in Europe, and the race is on between a group of “neo-brokers” hoping to seize the opportunity to bring zero-commission trading to the continent.

Robinhood has become the venue of choice for millions of US retail investors, but it put its European launch on hold, leaving the field clear for local competitors.

A handful of start-ups such as Trade Republic in Germany, Freetrade in the UK and Bux in the Netherlands have seen their user numbers shoot up to between 400,000 and 600,000 in recent months, and they are now expanding across Europe in a scramble for market share. 

Promising low-cost access to trading in thousands of shares, funds and cryptocurrencies, these online platforms are undercutting the high commissions that European banks often charge retail investors.

However, there is growing regulatory scrutiny of this dash to reshape Europe’s trading landscape after Robinhood attracted the ire of US lawmakers for blocking users from buying shares of GameStop, the video games retailer, when its shares skyrocketed earlier this year.

Steven Maijoor, chairman of the European Securities and Markets Authority, last week expressed concerns that “specific aspects of online brokers’ business models” could incentive “risky short-term trading strategies” and lack transparency on their fee structure.

As the online platforms expand across Europe and regulators put them under the magnifying glass, it is worth examining the key differences in how they make their money.

One of the biggest differences is whether trading platforms earn money by selling their order flow to a market maker — as Robinhood does in the US. Regulators in the UK and the Netherlands have quashed this practice over conflict of interest fears. But in Germany brokers are still allowed to sell their order flow by the country’s financial watchdog BaFin.

For instance, most of the orders Trade Republic receives are sent to Düsseldorf-based market maker Lang & Schwarz, which acts as the counterparty and processes the trades on the Hamburg stock exchange. 

In return, Trade Republic receives a fee. Christian Hecker, co-founder of Trade Republic, says he is “certain” that the way the company is paid for orders is to “the benefit of its customers”.

But Trade Republic’s rivals question whether the structure presents a conflict of interest, especially as the start-up’s board member Andreas Willius also sits on the supervisory board at Lang & Schwarz.

“If you only make money from the market maker, then they are the real customer, not the users,” said one rival. 

Other rivals said the practice leads to inflated bid-ask spreads in prices quoted out of normal trading hours, particularly for US stocks like Tesla or GameStop. But Hecker said his users are guaranteed prices in line with those quoted on the Frankfurt exchange operated by Deutsche Börse, and he denied there was any conflict of interest in Willius’s roles.

Hecker pointed out that other neo-brokers charge foreign exchange fees for trading in non-eurozone shares, something Trade Republic does not do — it charges €1 on each trade to cover its expenses. 

Others have different models. Scalable Capital in Munich, which also sells its order flow, charges a “Netflix-style subscription” of €2.99 per month for unlimited trading, or it charges 99 cents per trade. Bux in the Netherlands offers commission-free trades that are bundled and all processed at the end of the day, or €1-per-trade for immediate order execution.

Freetrade in the UK charges for foreign exchange on foreign securities and for tax-friendly ISA investment schemes. But for £9.99 a month, users get a premium service, which includes 3 per cent interest on deposits.

All this is set for growing scrutiny.

“The phenomenon of zero-commission trading needs to be looked at in more detail,” Maijoor said last week. “To be sure, as such lower costs for retail investors are a welcome development, given the importance of costs in determining investors’ long-term returns. However, there is no such thing as a free lunch.” 

He added: “Payments for order flow from third parties such as market makers may substitute commissions that are otherwise paid by clients, creating conflicts of interest and resulting in less transparency for retail clients.”

Quick fire Q&A 

What’s your name? APEXX Global

When were you founded? 2016

Where are you based? London, UK

Who are your founders? Peter Keenan, Toreson Lloyd, Rodney Bain

What do you sell, and who do you sell it to? APEXX offers payments processing solutions to enterprise businesses with complex payments requirements. 

How did you get started? The APEXX Founders believed merchants with advanced payments requirements were being underserviced; APEXX was born to meet those needs.

How much money have you raised so far? $12m, and we have a Series B raise in progress.

What’s your most recent valuation? >$100m

Who are your major shareholders? Forward Partners, MMC Venture, Alliance Ventures and seed round investors.

There are lots of fintechs out there — what makes you so special? APEXX’s routing capabilities allow merchants to direct transactions to the best provider in real time — increasing conversions and cutting costs.

FT’s Tech Tonic podcast is back

Every minute we collectively send 190m emails, 59m messages and 19m texts. We conduct 4.1m Google searches and swipe 1.6m times on Tinder. In the first episode of the FT’s new Tech Tonic podcast, innovation editor John Thornhill examines the promises and dangers of our accelerated online world. Click here to listen.

“Technology as the saying goes, is neither positive nor negative. But nor is it neutral. We must guard against the risks of the data economy running out of control, and we should become wise enough to direct it to our ends.” — John Thornhill

Fintech Fascination

Klarna raises another $1bn: Investor appetite for buy-now-pay-later firms shows no sign of slowing down. Klarna on Monday regained its crown as Europe’s most valuable private fintech after raising $1bn to help it fund potential acquisitions. Chief executive Sebastian Siemiatkowski said the company plans to go public in the next year or two, but it is increasingly interested in using a direct listing like Swedish peer Spotify, rather than a traditional IPO.

UK seeks “digital big bang”: The long-awaited “strategic review” of the future of UK fintech was published on Friday. Among former Worldpay chief Ron Kalifa’s recommendations to help London and the wider UK hold on to its leading position in the sector: a new visa for tech employees, changing the UK’s listing regime to encourage more IPOs and a £1bn growth fund to meet rising investment demand. Unsurprisingly, the report — which repeatedly said fintech is “hugely important” for the future of the UK economy — was welcomed by most of the industry. Some executives, however, argued that there was no single “silver bullet” that would cancel out the negative impact of Brexit.

Top execs sach off Goldman for Walmart’s new fintech: Walmart, the world’s largest bricks-and-mortar retailer, has given away few details since revealing at the start of the year that it was working on a new fintech. Its latest executive hires, however, show the company is taking its tilt at the banking sector seriously — it has tempted away two top Goldman Sachs bankers to help lead the new initiative, including Omer Ismail, who has played a key role in the development of Goldman’s own consumer business Marcus.