Stock broker classification and comparison

Most broker comparison sites lump brokerages together, as they lack in-depth knowledge of how investors think about counterparty exposure and products. Most sites are also conflicted, often favouring brokers with the highest commissions. We take a more professional view. How would an institutional investor classify them?

Discover forex-central.net's classification system, developed in-house by our team.

This is a blueprint for navigating the brokerage landscape, although you should remember that 1) not all intermediaries fit neatly into little boxes, and 2) your region can change the game.

Key points to remember:

• The traditional brokerage arm of a bank - such as with HSBC or Barclays Bank, which are an integral part of the global financial system. These brokers are reliable because of their bank affiliation, but their costs are high and they often don't have a full range of products, as they're not part of the bank's core business.
• Direct brokers backed by a banking group – such as Interactive Investor, Charles Schwab UK and Freetrade, are leaders in direct-to-consumer digital services and offer banking group affiliation – often with digital banking services – as well as the benefits of lower costs.
• Level 1 brokers – may hold banking licenses, but primarily focus on brokerage services. Banking is not their core business and they are generally not bank-owned. They offer competitive rates and in-depth products. Some companies in this category - such as Interactive Brokers - may be publicly traded and/or rated by a rating agency.
• Level 2 brokers – these neobrokers offer highly competitive pricing and user-friendly platforms with an international reach, making them attractive to beginners and a viable broker diversification option among more experienced investors, but average balances remain low.
• Level 3 brokers – they focus on speculative products like CFDs and cryptos, lack core ETF offerings for long-term investors, and potentially operate under less regulatory oversight.
• Hybrid brokers: they offer long-term investment solutions such as shares and spot ETFs, but also speculative products such as contracts for difference (CFD).

1. Brokers backed by a banking group

The broker or its parent company is often referred to as a Global Systemically Important Institution (G-SII). They are key to the financial system of a country or an economic area.

The traditional brokerage activities of banks

HSBC, Charles Schwab UK, Société Generale, Bankinter, Barclays, etc.

These brokers are part of an established and Global Systemically Important Bank (G-SIB). They are often rated, listed and transparent. However, they have a number of disadvantages. They can be:

• Non-essential - these brokers are generally an ancillary service of an established banking group.
• Relatively expensive - they are typically not very competitive for long-term investors.
• Lack of product depth - they may not have access to certain markets for advanced investors.

Direct brokers within a banking group

Fortuneo, Boursobank, Bolero, Comdirect, Fineco, etc.

Brokers within this category have a direct-to-consumer business model (minimal traditional infrastructure), often with a modern approach tailored to customers' mobile needs. They are generally part of major banking groups. The key difference with the first group is that they are:

• Modern, independent leaders - Fortuneo and Boursobank, for example, even offer banking, advisory or asset management services. Most operate without physical branches and have good mobile apps.
• Relatively cheap - while the first group was expensive, the brokers in this group are very competitive for long-term investors.

They include HelloBank (BNP Paribas), Fortuneo (Arkea), Boursobank (Société Generale), Bolero (KBC Bank) and Comdirect (Commerzbank). Fineco is an exception, as it is an independent integrated financial group with a unique business model.

2. Independent brokers

The brokers in this group focus on the brokerage business. They aren't part of a systemically important banking group. However, Level 1 brokers in this group may still be significant in some countries and may even have banking licences (but this is not their core business).

Level 1 brokers

SAXO, IG, Interactive Brokers, Swissquote, Lansdown, etc.

These brokers are independent, may have banking licences, which works in their favour in our assessment, but their core services revolve around the brokerage business, so the revenue stream is not diversified. What makes them unique is that:

• They can appeal to institutional investors - The sophistication of some of them makes them a credible counterparty for institutional investors. In addition, brokers in this category, such as IBKR or SAXO, often act as market access providers for Level 2 brokers.
• They are industry leaders - in at least one key developed market. Brokers in this group are generally competitive for long-term investors, although prices in this category vary considerably - check before you invest.
• They are large and more transparent - Brokers are classified as large institutions by regulators - leading to increased scrutiny - and/or have millions of customers. They are usually rated by a rating agency, and/or listed on a stock exchange. Average customer balances are generally high.

Level 2 brokers

Trade Republic, Bitpanda, Scalable Capital, Lightyear, etc.

Brokers in this category include established brokers that aren't the most sophisticated players in their market and "neobrokers". Security and transparency vary considerably within this group. The leaders in this category may have a banking licence and be listed on the stock exchange, but most are less transparent, venture capital-backed and still have to prove that they are consistently profitable. To overcome, for example, the ban on PFOFs (payment for order flow), they have started to engage in banking activities, but they are not backed by an established banking group.

However, they do have some unique features that make them very attractive to beginners and offer the potential diversification that more experienced traders enjoy:

• Very cheap - Most of them offer commission-free ETFs and equities and are in general very cheap for small trades and often for larger trades too. They lead all categories in this respect.
• Cutting-edge platforms - Their platforms and mobile apps are at the cutting edge in terms of user-friendliness and interface design, high-level reporting and account opening ease.
• An international presence - While bank brokers and some Level 1 brokers may be local, Level 2 brokers are generally present in most EU countries, and in the UK.

Level 3 brokers

For example, AvaTrade and Pepperstone.

These platforms are aimed at sophisticated investors or speculative day traders.

They generally have:

• A speculative offer - as part of their core offering, including CFDs and cryptocurrency pairs.
• No equities or cash ETFs - Traders won't find financial products for long-term investing.
• Opaque pricing - They are responsible for pricing their instruments and products. Prices will differ from those provided by other brokers and from market levels, as well as from current prices on other exchanges or platforms.
• Regulation - They may sometimes be supervised by Level 2 regulators whose expertise is potentially weaker.

Hybrid brokers

For example: XTB et Admirals.

Historically, these brokers focused on CFD trading, but they now also offer securities accounts (cash equities and ETFs), and even savings accounts, with some like XTB offering interest on uninvested cash.

These brokers have characteristics of all 3 above-discussed levels:

• Regulation - They are globally regulated by recognised bodies.
• Brokerage fees - Most of these brokers offer commission-free trading of equities and ETFs, and are generally very inexpensive for speculative trading in CFDs on indices, currencies and commodities.
• Platforms - Their trading platforms are both sophisticated and intuitive, making it possible in most cases to invest in all markets and all product types from the same account. Automatic trading and copy trading solutions are also available.

Conclusion

The online brokerage landscape is complex and varied, with a multitude of options for investors of all levels. Our broker classification and comparison system offers a clear and professional view, taking into account not only costs, but also institutional strength and the range of products on offer. Brokers backed by banking groups offer greater security but this is often at a higher cost, while independent brokers and neobrokers stand out for their competitiveness and technological innovation. Hybrid brokers combine the advantages of the different categories, making selection even more nuanced.

To choose the broker that suits you best, it's crucial that you understand your specific needs in terms of costs, security, available products and your long-term investment objectives. By using our classification system, you can navigate the world of online brokers more easily and make more informed decisions.

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