Commission-Free Brokers in 2026: PFOF is Dead. Long Live Conflict of Interest (It’s Worse).
Definitive guide to choosing a stock broker - Part 6
This is part 6 of Bankeronwheels.com Definitive Guide to choosing a Stock Broker.
‘Free trading’ often advertised by Brokers is not as free as you think it is. Often, higher spreads are what Commission-Free brokers use to get compensated, and investors are hardly aware of it.
In the past your trades were sold, and matched on an exchange – often German – with a single market-maker. It often resulted in worse prices. The broker got a kickback for selling your order. That’s how Trade Republic, Scalable Capital or Smartbroker got some of their revenues.
After investigating the practice, the EU banned it. In June 2026, a EU-wide ban comes into effect, and these payments will no longer be allowed. But as usual in finance, legislation is a step behind financial engineering and creativity. Today, let’s see how commission-free brokers went around the ban.
KEY TAKEAWAYS
- The classic brokerage model is most transparent. It benefits individual investors by routing orders to transparent venues like XETRA, where multiple market makers must fiercely compete to fulfill the trade, ensuring high liquidity, tighter spreads, and reduced conflict of interest for the broker.
- The Single Market Maker (SMM) model was common among EU commission-free brokers until the 2026 ban. It routed orders to a single market maker in exchange for a PFOF kickback (aka legal bribe), which funded “free” trades but often burdened investors with higher hidden costs due to a lack of price competition and wider spreads.
- The 2026 ‘de facto SMM model’ made conflicts of interest worse. For example Scalable Capital via their own European Investor Exchange, circumvents the 2026 EU PFOF ban by creating a “closed-loop” system where the broker operates the venue and assigns only one specific market maker per instrument. The incentive to route to their own venue is stronger than the incentive to route to an external PFOF venue before the ban. The irony is that the EU ban made the conflict of interest even worse.
- Independent studies consistently show that SMM models and most likely their 2026 ‘de facto’ successors deliver worse execution quality. Price deterioration occurs in up to 86.4% of cases and may only benefit very small trades. Despite the PFOF ban, the disadvantage for investors remains unchanged. Conflicts of interest are exacerbated by the 2024 removal of RTS 28 transparency reporting that once helped investors hold them accountable.
- To execute a large order competitively – prioritize Tier 1 brokers (like Interactive Brokers or Saxo) that provide competitive trade execution. If you use Tier 2 brokers, you must manually bypass their default, opaque exchange to avoid being “captured” by a single market maker’s spread; for exceptionally large trades, consider an RFQ/OTC trade.
How do brokers make money on my Trades?
There are two brokerage revenue models
Traditional Broker Business Model
CASE #1 - TRADITIONAL MODEL
Trading Vanguard FTSE All World ETF
My above image illustrates the traditional “LIT” exchange model, a transparent system. Retail investors send buy or sell orders to a Traditional Broker (such as Saxo or Interactive Investor), who acts as a licensed gateway. While brokers may match orders internally their smart routing systems will typically compare it to all exchanges for you to get the best price. Other times, the broker routes them directly to a Classic Exchange like XETRA.
Why is this good as individual investor?
If your broker sends your Vanguard FTSE All World ETF order to XETRA there will be at least a few mandated market makers (“MM”) that have the duty to provide constant liquidity and fiercely compete for your order. When I checked this ETF in March 2026 these MM were: Baader Bank AG, Flow Traders B.V., Optiver V.O.F., and Societe Generale S.A. Frankfurt. If IBKR, SAXO or Swissquote compare the best price to other exchanges, or even an internal system there will be even more competition. That’s a great outcome for any Golden Retriever!
The broker earns its commission from you, MMs make money on spreads – but not excessively so because of high competition. It provides transparent order execution through various market venues, and broker has a lower conflict of interest risk.
Commission-Free Model Before 2026
Case #2 Prior 2026: COMMISSION-FREE MODEL WITH PFOF
Until 2026, a lot of EU and in particular German Commission-Free Brokers used a Single Market Maker (“SMM”) Exchange model. Brokers – such as Trade Republic, Scalable Capital, or Finanzen.net Zero – routed their customers’ orders to one specific private exchange like gettex or Lang & Schwarz. Unlike the transparent “LIT” model, these SMM exchanges often have only one market maker per instrument, leading to lower transparency and very low competition.
If you traded Vanguard FTSE All World via Trade Republic they sent your order to Lang & Schwarz, which had Lang & Schwarz TradeCenter as the only market maker! As you can imagine, this was great business for the exchange, so as a compensation, the broker received a PFOF Kickback (a payment) from the exchange for sending them your order. While this allowed the broker to offer “free” or €1 trades, the investor may have faced higher “hidden” costs through wider bid-ask spreads, as there are fewer market makers competing to give you the best price. The EU didn’t like this – similar to the UK regulator which banned it over a decade ago – so from 2026 this model got banned.
Commission-Free Model After 2026
Case #2 AFTER 2026: COMMISSION-FREE MODEL NO PFOF
In 2026, brokers need to become more creative. They cannot get a legal bribe, but since they knew from their old friends from Lang & Schwarz, Gettex or Baader Bank (some senior folks worked for both the brokers and the exchanges!) that being SMM was a lucrative business, they thought they could cut them out and get into the business of market making themselves. Not because they necessarily needed to, but because the EU ban required them to become more creative about their business model, to go around the new law.
Some brokers are still in the middle of sorting out the details of how it will work. Trade Republic which in January 2026 received a license from Germany’s BaFin to operate a multilateral trading facility is lagging behind Scalable that prepared the ground already in 2024.
The above image represents the setup of Scalable Capital – since they are the most advanced in their rollout – as you would expect from former Goldman Sachs bankers 😉
Scalable Capital operates through its own co-founded exchange, the European Investor Exchange (EIX). In this “De Facto SMM” arrangement, the broker establishes the very exchange where the trades happen. While EIX technically has two market makers, when you go through the legal documentation of the venue (I did, translated below) it assigns only one specific market maker per instrument:
“§1 (2) As part of the inclusion process, the Management assigns each security to one of the authorized market makers for quoting purposes. After the initial inclusion, the Management may change the assignment of securities to market makers after consulting with the market makers concerned, with one trading day’s notice”
This creates a closed-loop system where the broker is effectively both the gateway and the venue. And as the lead operator, it’s likely they will assign popular and lucrative ETFs or other securities to themselves.
Because there is no competition between market makers for your specific trade, the “Single-Market-Maker-Per-Instrument” setup may result in less favorable pricing for the individual investor compared to a traditional, ‘true’ multilateral exchange.
But Am I worse off?
If it looks like a duck and swims like a duck
In theory You should benefit....
In the US PFOF is still legal, your order may land in a Dark Pool of a High Frequency Trading Firm like Citadel, which will profit from the transaction. To paraphrase Matt Levine, PFOF should be beneficial to everyone. Here is a situation:
- A million people come to a broker to trade GameStop Stock. Half of them want to buy, half of them want to sell. All using market orders, all at precisely the same time.
- Normally, the broker would pay the exchange a small fee for executing orders. The exchange has half a million shares of GameStop for sale at $58.25, and a million shares for buy at $58. The broker can send orders to the exchange, where the buy orders would be filled at $58.25 and the sell orders would be filled at $58.
- But, the broker realises shares could be matched up. They don’t have to pay a fee to the exchange, the buyers don’t have to pay $58.25, and the sellers don’t have to get $58. The buyers could pay $58.15 and save 10 cents, the sellers could get $58.10 and make an extra 10 cents, and a broker keeps 5 cents (and avoids an exchange fee). This is called “internalizing”. Here is how IBKR does it.
- In practice, less sophisticated brokers don’t have the ability to do this. They subcontract it and send orders to a “wholesaler”. The wholesaler pays the sellers more, charges the buyers less, and keeps a margin for itself. But, instead of keeping 3 cents for itself, it sends 2 cents back to the retail broker, for Robinhood, who sent it the trade (that’s the PFOF Commission).
Remember, in Europe PFOF is now gone, but the same logic still holds for the new SMM exchanges established by neobrokers. It’s just that they don’t make a visible payment for it. Is it better in Europe to send your order to an opaque exchange rather than a Hedge Fund like in the US? I don’t think so. While in theory it’s slightly different, If it looks like a duck, swims like a duck, and quacks like a duck… then probably it is a duck!
in practice regulators have no doubt the investors are worse off
Independent Studies into quality of Execution
| Study | Country | SMM/PFOF Execution | Worse Execution |
|---|---|---|---|
| Authority for the Financial Markets | Netherlands | Worse | 68% to 83% Cases |
| Comision Nacional Del Mercado de Valores | Spain | Worse | 86.4% Cases |
| CFA Institute - execution post 2012 Ban | UK | Worse | 65% vs 90% Best prices |
| Bafin | Germany | Mixed | Better only for Small volume trades on DAX securities¹ |
But, as you saw, in theory that should benefit everyone shouldn’t it? Well, the problem is, the execution is not transparent. And when things are opaque, there is more incentive to skew the capture of value from the trades. Numerous independent NCA and CFAI studies confirmed worse execution through SMM Exchanges (there were also studies by Scalable Capital and others, but as you can imagine they were not really independent):
- A Dutch study reveals that orders executed through SMM fare worse than non-SMM venues, with price deteriorations between €1.44 to €3.46 in 68%-83% of cases for €3,000 transactions.
- A Spanish study found 86.4% of trades in SMM trading venues underperforming, resulting in a 0.14%-0.16% price deterioration.
- A CFAI Study, post 2012 ban in the UK, observed best execution in 90% cases vs 65% prior to the ban.
- In the Bafin study, DAX and non-DAX securities for different trade sizes were compared. Any non-DAX security above €500 and any DAX security above €2,000 had worse execution on SMM venues.
Has anything changed in 2026? Yes, Brokers don't receive a partial PFOF kickback anymore. They can pocket the entire spread.
After 2026, nothing has fundamentally changed. As before, and demonstrated by the EU & UK studies, there are outsized profits to be made from matching retail orders on an opaque “de facto” SMM Exchange because there is less competition, and benchmarking may be partially gamed. The rules for EIX is to stay within the spread of reference exchange like XETRA, but this is a floor not a competitive mechanism. It doesn’t allow for price improvement. It also gives SMM discretion including trading, settlement and currency conversion costs adjustments, reference volume adjustments, and much more discretion in after-hours trading when the reference exchange is by definition closed.
The difference is that SMM are/will be operated by commission-free brokers. Brokers don’t receive a partial PFOF kickback anymore. They can pocket the entire spread. The incentive to route to their own venue is therefore stronger than the incentive to route to an external PFOF venue before the ban. The irony is that the ban made the conflict of interest worse.
Finally – cherry on the cake – from 2024, brokers are no longer required to report detailed information on trading venues and execution quality through RTS 28 reports. EU regulation can sometimes be excessive, but here it was really beneficial – a removal was not a great move for transparency. So, brokers can always add a couple of parties to their platform – to appear fair – but in practice route almost all of the business to their preferred exchange. That was almost always the case as I could see in their historical filings.
So, how can i pass a large order in a competitive way?
Tier 1 bROkers
For investors with significant amounts to invest going through a Tier 1 broker or a Bank that gives you direct access to a LIT Exchange, or through a competitive routing system with market makers from multiple exchanges is the easiest solution. For even larger trades an RFQ/OTC trade could also be beneficial – more on that in a separate guide.
Tier 2 BROKERS - SCALABLE, TRADE REPUBLIC or SMARTBROKER
Know where to send your order
If you use a Tier 2 Broker you need to ensure they give you access to other exchanges (some don’t). There are primarily two types of exchanges for ETFs in Europe – Traditional and Quote:
- Traditional Exchanges (or Lit Pools) – like XETRA in Frankfurt, operate in a transparent environment where trade orders and prices are visible to all market participants. This transparency ensures price discovery and fairness in trading. These exchanges have a central order book – you can see the best bid and offer prices, including volumes requested or offered. There is also insight into the depth of the order book.
- Quote-driven markets – like Gettex in Munich or Tradegate Exchange in Berlin. There is no depth of the order book. These exchanges only show the “best” bid and ask price. L&S Exchange and Tradegate show how many shares are available or in demand at those prices, at Gettex even that is not transparent.
Select Traditional and quote-driven Exchanges
| Exchange | City | Country | Type |
|---|---|---|---|
| XETRA | Frankfurt | Germany | LIT |
| Gettex | Munich | Germany | Quote |
| Tradegate Exchange | Berlin | Germany | Quote |
| Lang & Schwarz Exchange | Hamburg | Germany | Quote |
| Quotrix | Düsseldorf | Germany | Quote |
| Börse Stuttgart | Stuttgart | Germany | Quote |
BUT WAIT, AREn'T all EU exchAnges supposed to be multilaterAL and competitive?
In theory, it's called a multilateral exchange
Now, in theory, your trade goes to a Quote Driven Market that should be competitive.
In theory, it’s called a multilateral exchange. But here is the crux of the matter. The provisions within the exchanges’ rules make it almost impossible for non-affiliated firms to participate.
If we look closer:
- Gettex? Only one market maker for shares, funds, ETPs and bonds (Baader Bank).
- Lang & Schwarz? One market maker for all orders executed by Lang & Schwarz TradeCenter AG & Co. KG.
- Tradegate Exchange? One market maker. Tradegate AG which partially owns the exchange is the only party responsible for completing orders in equities and ETFs.
Should i be worried about my broker business model?
some brokers are more vulnerable to the EU ban
As you can imagine, the brokerage landscape in the EU is currently being reshaped. Particularly in Germany where PFOF spread like the plague in the past. Individual investors should be aware that some of them are more vulnerable to these changes than others. For instance, Trade Republic derived over a third of its income from PFOF, according to the company.
Of course, quote-driven exchanges that are partially losing business from neobrokers also need to adapt. In fact, some of them go through the same integration as Scalable Capital but in opposite direction. In 2024, Tradegate Exchange launched its own broker tradegate.direct that directs trades to – you guessed it – Tradegate Exchange.
Today, we see that:
- Brokers offer investors the choice of exchanges, but SMM venues may still be given preference in the user interface (cheaper visible fees for investors)
- Clearing, trading or custody fees may be covered by the operator of the Exchange.
Be mindful if you trade above €500
While I appreciate ‘democratisation’ of investing in Europe for smaller investors or even some market innovations from some of these brokers – including Scalable launch of a hybrid ETF – in some aspects like trade execution the fees and incentives are really not transparent, and can be detrimental to investors.
You should be aware that, when passing an order on a SMM exchange, the quality of execution you get may not be the same as with a traditional exchange, especially if you trade amounts higher than €500, as indicated in the Bafin Study.
Broker business models will change, but opaque, single market-maker exchanges are probably here to stay. Be sure to understand the implications.
What else should you consider?
In the next part of this guide, we will look at Broker ETF availability. Which ones give you the most options?
Good Luck and Keep’em* Rolling!
(* Wheels & Dividends)
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