Speculation had been running high, so it was a good move for Scalable Capital to provide some clarity with an official announcement. The neobroker is now entering the stock exchange business by setting up the European Investor Exchange (EIX) to strategically prepare for the upcoming loss of rebates from Payment for Order Flow (PFOF). It had long been speculated that neobrokers would set up their own market maker to process customer securities orders, and Scalable has now made it official, in partnership with the Hannover Stock Exchange, which is part of the BÖAG Börsen group.

It was unexpected that the Munich-based neobroker would opt for Hannover, and having sprung a surprise they need to make it successful in practice. But the chances look good, as the two founders of Scalable, Florian Prucker and Erik Podzuweit, are trading professionals who know exactly how the mechanics of securities trading are structured. It’s also worth noting that Scalable has already been busy behind the scenes building a „fully verticalized“ tech platform that allows them to handle custody, stock exchange trading, clearing, settlement, and custody themselves.

The previous custodian partner, Baader Bank, is not out of the picture, but will no longer be the primary route for all transactions. For Scalable, it makes sense to primarily populate their own platform. It’s also important to remember that the Federal Financial Supervisory Authority (BaFin) prefers business to be spread across multiple shoulders, to ensure risk diversification and contribute to operational stability. In this sense, Scalable also plans to include deposit business: the license for this has been applied for with BaFin, but deposits will still be distributed to partners such as Deutsche Bank and BlackRock (money market funds). This offers flexibility for customers in terms of interest rate preferences, and allows Scalable to gradually scale its own deposit business in the future.

For the moment, Scalable does not appear to be aiming for a full banking license. Traditional banking business could be handled through an as-a-Service partner with a bank balance sheet. Trade Republic had taken the big step toward its own full banking license, but infrastructure adjustments caused some hiccups, resulting in delayed dividend bookings for many customers. A small setback that caused significant frustration. Now, it is up to Trade Republic to catch up with Scalable and present a trading model for the future. Just as Scalable had Gettex as an exclusive partner for trade flow, Trade Republic has an agreement with L&S Exchange.

For BÖAG, the parent company of the Hannover, Düsseldorf, and Hamburg stock exchanges, the Scalable deal is a nice success. The regional exchanges must capitalise on niches, and Scalable will expand as a neobroker and investment platform in Europe, with the EIX based in Hannover as the foundation for trading. Trading will have to prove itself under the planned new EU regime of a Consolidated Tape, where price quality requirements are likely to increase. The more liquidity is attracted, the better bid-ask spreads can be provided.

The next challenge for neobrokers will be pricing per trade. Until now, they’ve been able to keep costs to 1 euro, due to income from rebates. It may be necessary to charge more soon. However, this must be done very carefully, and almost in a homeopathic manner, or they won’t be able to market themselves as a free broker anymore. In practical terms, this means that charging more than 1 euro extra is unlikely to be feasible.