Autore: Prof. Enea Franza

In recent years, the emergence of neobrokers has profoundly transformed the way investors access financial markets, introducing a digital brokerage model that reduces costs, simplifies operations and expands the participation of small savers. The term “neobroker” commonly refers to digital platforms that allow access to financial instruments — stocks, ETFs, cryptocurrencies, sometimes options — through intuitive mobile apps, with fast account opening and low or no commissions, in stark contrast to the traditional brokerage model that involves physical branches, personalized advice and a higher cost structure.

Among the leading examples of global neobrokers is Robinhood Markets Inc., founded in 2013 in the United States, which was the first to introduce the zero-commission trading model, becoming a symbol of the democratization of investing and a catalyst for the retail trading boom during the Covid-19 pandemic. Robinhood has inspired numerous similar platforms in Europe and Asia, and still represents one of the most analyzed case studies for its impact on millennial investment behaviors and for the strong use of gamification. Another global player is eToro, founded in Israel in 2007 but with a strong presence in Europe, known for its social trading model, which allows users to automatically replicate the strategies of other investors; the platform combines elements of social networking and trading, and has helped spread the idea of collaborative investing.

In Europe, the neobroker landscape is particularly dynamic. In Germany, Trade Republic and Scalable Capital stand out, two of the pioneers of the European model of low-cost digital intermediation. Trade Republic, founded in Berlin in 2015, offers trading in stocks, ETFs and derivatives with extremely low fixed fees, and has become one of the leading European players in just a few years, exceeding two million customers in 2023. Scalable Capital, which started as a robo-advisory platform, has since expanded its offering to include an integrated neobroker, with a “freemium” model that allows free trading for selected ETFs and automated accumulation plans. Other significant European examples include Degiro (Netherlands), which stood out for integrating professional trading features into a simplified and low-cost interface, and Revolut, the British fintech originally focused on digital banking services, which later added stock and cryptocurrency trading within its app, thus becoming a hybrid case between digital banking and neobroker[1].

In the Italian context, the market for neobrokers is younger but growing rapidly. Among the most relevant local operators we can mention Directa Sim, founded in Turin in 1995, which despite being born before the “neobroker season”, represents a precursor of this model for its digital strategy and for having introduced online trading for retail customers in Italy with reduced costs. Today Directa maintains a consolidated position, with a completely online platform and an offer of flexible investment plans. Alongside it, new digital intermediaries have established themselves such as Fineco Bank, which, despite being a bank, offers an advanced online trading model with features close to those of neobrokers, and Young Platform, which operates mainly in the cryptocurrency segment, offering an intuitive interface and educational plans aimed at young investors. Moneyfarm, based in Milan and London, is also a significant reality: although it was born as an automated asset management platform (robo-advisor), its hybrid model of digital and low-cost advice places it near the neobroker universe.

The model in question has contributed substantially to the process of democratization of investment, understood as expanding access to financial instruments to categories of users traditionally excluded from the markets. In particular, the introduction of digital platforms based on automation logics and the use of intuitive interfaces has made it possible for individuals without previous technical skills or operational experience in the financial sector to participate. This transformation has been accompanied by a gradual reduction in economic and information barriers, thanks to the possibility of carrying out transactions with modest initial capital and the spread of solutions that promote transparency and simplification of decision-making processes. Think, for example, of the possibility of investing minimum amounts — even less than one hundred euros — in automated portfolios, simplified derivatives or fractional shares, offered by online trading platforms and retail investment applications. In this sense, the model in question has made investment activity more accessible and inclusive, promoting broader and more diversified financial participation.

That said, the spread of neobrokers raises significant issues — concerning both the behavior of retail investors, the quality of order execution, and the business structure of the platforms themselves — that deserve rigorous analysis. Firstly, as suggested, neobrokers are characterized by a greatly reduced cost model, or even zero for the single transaction, thanks to technological efficiency, standardization of services and the exclusive or almost exclusive use of mobile platforms. It has been found that these entities tend to generate revenues through alternative channels to traditional fees: for example, the practice known as payment for order flow (PFOF) – that is, the payment received from market makers or execution venues to route orders. Incidentally, this operating model involves an inherent conflict of interest as the intermediary may be incentivized to route orders not based on best execution for the client, but on the basis of the highest payment received[2].

In addition, the operating structure of these brokers is often “lean”, i.e. they operate with very lean costs and organization: they reduce fixed costs by not maintaining extensive physical branches, large offices or a large workforce, automate most processes such as account opening, trading and assistance via apps and digital platforms, and have less organizational complexity with few hierarchical levels and quick decisions,  focusing on a limited number of core products or services. This model allows for lower prices but implies less human support and less personalized protection. In addition, neobrokers offer a more limited range of instruments, focusing on stocks listed on major markets, ETFs and some simple derivatives, while there is a lack of complex mutual funds, structured products, advanced pension solutions and customized investment tools, which means that those with special needs cannot find everything they need in a single platform. Advisory services are simplified or absent: neobrokers do not offer personalized financial advice like traditional brokers and any guided services are reduced to digital tools such as automatic portfolio suggestions, alerts, push notifications or generic guides, so those who do not have sufficient financial literacy could make risky choices without realizing the implications. In summary, neobrokers are designed to be lean, digital, cost-effective, and user-friendly, making them accessible and fast, but riskier for inexperienced investors because they offer a limited range of products, provide little or no advice, and the “lean” model means less human support and risk mitigation tools.

Secondly, the profile of the investor who uses neobroker appears different from the traditional retail investor. Quantitative studies show that users of these platforms tend to be younger, less invested savvy, more risk-taker, and have a higher frequency of operations. For example, a 2022 study published in Junior Management Science showed that the clients of new brokers are predominantly young, adopt short-term investment strategies and are not typically aimed at retirement, and that the design of the application — simple, immediate, “playful” — exerts a significant influence on trading [3]behavior. Similarly, a German longitudinal survey found that users of trading apps have low financial literacy and often misunderstand how the platform makes money[4].

A third aspect concerns the behavioral effect and gamification implicit in the neobroker model: mobile interfaces, real-time notification, immediate visual metrics, the ease with which you can send an order with a single touch combine to transform the trading experience into an activity closer to the game than to the planned investment. This has significant implications, because it induces an increase in the frequency of trading (active trading), a focus on the short term, less strategic planning and – in some cases – a lower performance compared to more traditional and disciplined investors. Gamification, as already noted, has also been highlighted by CONSOB in the context of the “gamification of financial investments”, pointing out how neobrokers have facilitated potentially impulsive behavior[5].

From the point of view of the market and the microstructure of exchanges, the issue of order execution by neobrokers has emerged: the European Securities and Markets Authority (ESMA) has observed that many platforms of this type execute retail client lots on “small venues” that are less liquid than the main markets, with the consequence of spreads  larger and potential higher implicit costs for the investor. This means that although the fees are low or zero, the actual execution price may be less favourable, reducing the perceived benefit in practical terms. In addition, order profiling and routing can generate conflicts of interest, for example when the platform is remunerated to route orders to specific locations rather than maximizing the result for the customer. BETTER FINANCE’s “Inception Paper – Neobrokers” report published on 29 March 2024[6] clearly indicates that incentive models based on contractual inducements with ETF providers or listing providers may lead to recommendations of suboptimal instruments for the investor.

A further relevant issue is that of financial inclusion: neobrokers can be read as tools for democratizing access to capital markets for segments of the population that were previously excluded from such opportunities (young investors, with modest capital, digital users). The figures bear witness to this: for example, an analysis found that major investment apps have amassed over 130 million global downloads through February 2023[7]. On the other hand, increased access doesn’t automatically translate into better results or increased financial awareness. On closer inspection, financial literacy remains low among many users, which raises concerns about the potential for financial loss and reckless behavior. On this point, the study “The Role of Trading Apps in Shaping Investment Behavior” showed a correlation between the use of trading apps and increased risk-taking and trading frequency, concomitant with reduced levels of financial literacy[8].

On a regulatory level, the growth of neobrokers has attracted the attention of supervisory bodies, which are evaluating how to ensure the protection of retail investors, the transparency of business models and the quality of execution. CONSOB, as we have seen, has pointed out the issue of gamification and PFOF. At the European level, more stringent measures are being examined, for example towards the prohibition or restriction of payment for order flow for retail customers. In addition, the fragmentation of markets and the routing to “small venues” pose problems of transparency and quality of the result for the investor.

Neobrokers represent one of the most relevant evolutions of contemporary personal finance, marking the transition from a traditional, expensive and complex model to a more open, digital and immediate ecosystem. These platforms have broken down the economic and operational barriers that have limited access to the financial markets for decades, offering low-cost trading tools and an intuitive user experience even for non-professional investors. However, as mentioned above, the same architecture that makes neobrokers accessible also reveals their fragility. The absence of an advisory filter, the strong automation component and the revenue structure based on models such as payment for order flow can generate conflicts of interest and distortions in the execution of orders. High-frequency operation, often incentivized by interfaces designed to stimulate continuous interaction, amplifies the risk of impulsive behavior and decisions without adequate strategic evaluation. For the retail investor, using a neobroker means entering an environment where ease of use does not necessarily coincide with the security or effectiveness of financial choices. A higher level of awareness is therefore needed, both with respect to the mechanisms of operation of the platforms and in relation to one’s risk tolerance and long-term goals.

For supervisory and regulatory authorities, the affirmation of the neobroker model requires in-depth reflection on the balance between technological innovation and investor protection. Expanding access to financial markets cannot be interpreted as an objective in itself, but as a component of a broader process of democratisation of finance which, in order to be effective and sustainable, must be based on three fundamental pillars: transparency, awareness and fairness of intermediation. Innovation, in fact, must not translate into a retreat in protections, but into a redefinition of them consistent with the new modes of digital interaction. In this sense, regulatory attention should focus on aspects such as clarity of information regarding order execution mechanisms, the management of potential conflicts of interest inherent in remuneration models (such as payment for order flow), and the prevention of practices that, although formally lawful, may induce speculative or excessively impulsive behavior in retail investors.

At the same time, the democratization of market access requires a systemic strengthening of financial education, which allows investors to critically interpret the dynamics of digital trading and to understand the risks associated with increasingly sophisticated tools and platforms. Financial training, in this perspective, assumes the function of safeguarding stability and preventive protection, complementary to ex post regulatory action.

In the future, the economic-legal reflection will be able to contribute decisively to the reconstruction of the long-term effects deriving from the spread of neobrokers, examining their implications both on the micro-financial and on the macro-systemic level. On the individual side, it seems appropriate to investigate how digital intermediation affects the processes of wealth accumulation, the quality of diversification strategies and the evolution of retail investors’ risk preferences, also in relation to the cognitive and behavioral mechanisms that these platforms tend to solicit.

On a systemic level, the analysis will have to focus on the aggregate effects of the phenomenon in terms of market volatility, concentration of trading flows, homogenization of operational behaviors and, more generally, on the overall resilience of the retail financial ecosystem. Particular attention should be paid to the potential interconnection between algorithmic architectures, economic incentives and market dynamics, which could generate new forms of systemic risk that are difficult to intercept by traditional regulatory models.

An empirically based and interdisciplinary understanding of these dynamics is essential to provide supervisors with analytical tools suitable for adaptive and evidence-based regulation. In this perspective, the goal is not only to ensure the consistency of technological innovation with the principles of fairness, transparency and investor protection, but also to preserve the stability and efficiency of the markets in a context of progressive digitization and financial disintermediation.

Bibliography:

• “The Rise of Retail Investing: Robinhood and the Gamification of Stock Trading” (Financial Times, 2021).
• “Robinhood and the Stock Trading Revolution” (Harvard Business Review, 2021). 2. Investment gamification:
• Chen, X., & Wu, G. (2021). “Behavioral Finance and Gamification in Trading.” Journal of Finance. This study explores how gamification has changed investor behavior, especially among millennials.

• “The Effects of Gamification on Financial Decision-Making: The Case of Robinhood” (Journal of Behavioral Finance, 2020).
• “Payment for Order Flow and the Democratization of Trading” (Journal of Financial Economics, 2021).
• “Regulation of Digital Brokers: A Global Perspective” (ESMA Report, 20214. McKinsey & Company (2020). “The Neobroker Market: A New Generation of Investors.”

• “Neobrokers: A Revolution in Financial Services” (McKinsey Global Institute, 2022). “Financialization and the Digital Economy” (MIT Press, 2021).
• “The Rise of Neobrokers: How Digital Platforms Are Changing the Stock Market” (Harvard Business Review, 2021

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[1] In addition to the cases mentioned, it is worth mentioning Freetrade (United Kingdom), Public.com (United States) and Saxo Bank (Denmark), which have interpreted the concept of digital brokerage differently. Freetrade, for example, offers a commission-free trading model for retail investors, financing itself through optional monthly subscriptions; Public.com, on the other hand, combines social network and financial education components, aiming to build a community of informed investors; Saxo Bank, despite being a historical reality, has evolved its infrastructure to offer an entirely digital platform aimed at sophisticated investors, demonstrating how the neobroker model can also coexist with traditional brokerage models.

[2]The European Securities and Markets Authority (ESMA) states that “in most cases it is unlikely that the receipt of PFOF … would be compatible with MiFID II” (the European Financial Markets Directive) precisely because of these risks. In Italy, the National Commission for Companies and the Stock Exchange (CONSOB) in its 32nd “Legal Notebook” expressly points out that “sometimes the absence of commissions is made possible by remuneration policies based on … on payment for order flow“. Incidentally, it should be noted that, although orders can be routed to less liquid venues, to obtain the greatest gains, the intermediary is still required to ensure best execution for the investor.

[3] “Blessing or Curse? The Influence of Neobrokers on the Investment Behavior of Young Investors” by Maximilian Janussek, published in Junior Management Science (vol. 7, no. 5, 2022, pp. 1375-1399). See https://jums .aca- demy /wp-content/uploads/2022/12/MA_Janussek.pdf

[4] https://data.mendeley.com/datasets/jv36jsfd8v/1?utm_source=chatgpt.com

[5] Consob’s legal paper number 32 analyses the gamification of financial investments, i.e. the use of game mechanics in online trading platforms and social media, and highlights how these techniques particularly influence retail investors, leading them to more impulsive and risky choices as a result of notifications, rewards and competitive dynamics. The study cites cases such as GameStop and Robinhood and proposes regulatory updates to strengthen investor protection against new digital forms of investment. See: https://www.consob.it/web/area-pubblica/abs-qg/-/asset_publisher/pWAo8NyvjOZ1 /content /qg32/11973?utm_source=chatgpt.com

[6] https://betterfinance.eu/wp-content/uploads/BF-Neobrokers-Inception-Paper-v1-2024_.pdf

[7] https://finbold.com/investing-apps-downloads-statistics/?utm_source=chatgpt.com

[8] https://chatgpt.com/#:~:text=%E2%80%9CThe%20Role%20of%20Trading%20Apps%20in%20Shaping%20 Investment%20Behavior%E2%80%9D%20su%20DOAJ