A BETTER FINANCE Focused Paper on Fractional Investing
The rapid expansion of neobrokers across the European Union has fundamentally reshaped the retail investment landscape by introducing mobile-first, low-cost platforms characterised by streamlined access to financial markets. Central to this transformation is the advent of fractional investing, allowing individuals to acquire portions of securities for minimal amounts. This innovation has enhanced market accessibility, particularly among younger and first-time investors, and supported the development of automated, goal-based savings plans.
However, the proliferation of fractional trading models has also revealed significant legal, behavioural, operational, and regulatory gaps. Current practices frequently involve the internal pooling of assets and the reliance on proprietary matching mechanisms, raising concerns regarding execution quality, price transparency, liquidity, and the safeguarding of client assets. Fractional investments are often not registered with central securities depositories, resulting in complex legal entitlements and limited portability. Furthermore, the absence of direct shareholder rights, particularly in derivative-based models, exacerbates the misalignment between investor expectations and legal realities.
Behavioural risks are also inherent, as the design of neobroker platforms may encourage impulsive trading behaviours, particularly among inexperienced users. Moreover, the blurring of commercial promotion and educational content risks undermining the quality of investor information, contrary to the principles of the MiFID II framework.
At present, the EU regulatory framework does not fully accommodate the unique characteristics of fractional instruments, leading to divergent supervisory practices across Member States. While the European Securities and Markets Authority (ESMA) has provided initial clarifications, a coherent and harmonised approach at the Union level is urgently needed to ensure effective investor protection, legal certainty, and the smooth functioning of the internal market.
BETTER FINANCE, therefore, advocates for the establishment of a harmonised EU regulatory framework that clearly distinguishes between derivative-based fractional models and co-ownership structures. Such a framework should:
- Ensure transparent classification and disclosure obligations;
- Mandate the alignment of execution practices with MiFID II best execution principles;
- Encourage the routing of fractional orders through regulated markets or multilateral trading facilities;
- Foster the development of future-proof infrastructures, including Distributed Ledger Technology solutions, to enhance portability and liquidity.
By doing so, the European Union can foster innovation while upholding the core principles of investor trust, market integrity, and financial inclusion, thereby contributing to a more competitive and resilient Capital Markets Union.
⬇️ Read & Download the Research Paper ⬇️