No-Fee Brokers Reviewed by EU For Possible Conflicts of Interest

Zero-commission stock brokers are coming under increased scrutiny in the European Union as officials suspect their business model might run counter to the bloc’s market regulations.

Services including Etoro Europe Ltd. and Trade Republic Bank GmbH have sprung up to offer European investors cheap ways to trade. While they’re smaller than their U.S. counterparts such as Robinhood Markets Inc., regulators say they could grow rapidly and are used mostly by investors under the age of 30 on smartphones.

The European Commission thinks brokers that charge extremely low or zero commission may make money by routing trades to market makers, a practice that could keep brokers from acting in their clients’ best interests, according to a May 10 letter seen by Bloomberg News.

“We will form an opinion whether the current rules are sufficient to apprehend possible conflicts of interests or shortfalls in terms of retail clients obtaining best execution for their share trades,” Mairead McGuinness, EU commissioner for financial services, said in the letter addressed to Markus Ferber, a member of the European Parliament.

Officials are looking at whether the EU’s market regulations under MiFID II allow for the “payment for order flow” business model, McGuinness said. The commission also asked national authorities to scrutinize the businesses in more detail.

According to the letter, officials will assess whether “amendment to the existing MiFID rules appear necessary, also taking into account what is often referred to as the ‘gamification’ of retail investing.”

Regulators in the U.S. have said that Robinhood’s platform encourages the game-like nature of trading, particularly among inexperienced investors. Gary Gensler, chairman of the Securities and Exchange Commission, said at a congressional hearing this month on the wild trading of GameStop Corp. that many regulations were written before recent technologies changed the way trading is done.

“Payment for order flow-arrangements are at odds with some of the basic principles of EU financial market regulation,” Ferber said in an emailed statement. “There can’t be any regulatory rebate just because a fintech is using different distribution channels than a traditional bank.”

The commission didn’t haven an immediate comment on the letter.

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