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Can Israeli Regulators Curb Booming Algo Trading in FX?

The ISA has banned a local FX brokerage from using robots, classifying it as unlicensed investment advising. But if traders

While the Israel Securities Authorities (ISA) examines license applications submitted by Israeli brokers (due to be completed in 2016), it is also cracking down on practices of which it does not approve. According to Israeli media, the ISA sent last week a letter to Matach24, an Israeli forex brokerage, banning the use of algo trading, arguing that the practice embodies unlicensed portfolio management by the Tel-Aviv based broker.

Algo trading in FX has been making headlines in Israel’s financial press following what seems to be a ponzi scheme led by the local broker UTrade, which was banned last week from any business activity. After it was revealed that CEO Talmor has left Israel and that most of the clients’ funds have vanished, a Tel Aviv court appointed a temporary liquidator for the brokerage and its website was shut down.

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Since information flow became fast and widespread, it’s hard to define what investment advice is

Recent events show that it’s not quite clear what the buzzword ‘algo-trading’ means exactly, and whether it qualifies as portfolio management. While the Israeli watchdog last August warned the public of unlicensed algo trading and banned all activities, a few Israeli firms kept promoting this trading method on their websites. By trying to protect retail traders, it seems that the ISA has tarred all aspects of algo trading with one brush.

Speaking with Finance Magnates, Matach24’s CEO David Mesika shed some light on the investment procedure, stressing that investors are the ones choosing the algo trading parameters, and so they are managing their own portfolios. “I’m giving the traders robots, followed with explanations, statistics and back-testing by demand,” Mr Mesika said, emphasizing that his company holds a supporting legal opinion written by a former ISA legal executive.

 

“Huge leap forward”

 

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Itsik Noy, the head of Israel’s Trading Arenas Association (ITAA) and founder and CEO of Smart Capital brokerage, disagrees with the ISA’s definition of investments advice, stating that laws should be up to date for 21st century technology. “The ISA is making these days a huge leap towards the digital world, though a fundamental review is necessary for online trading regulations,” he said. “Since information flow became fast and widespread, it’s hard to define what investment advice is. Within my dialogue with the ISA, I asked their representatives if the Israeli trading market should be as it was during the 90’s, or should we be prepared for 2035. The answer was the latter.”

Advocate, Notary and Chairman of Tal Ron, Drihem & Co., Tal Itzhak Ron
Advocate, Notary and Chairman of Tal Ron, Drihem & Co., Tal Itzhak Ron

By trying to protect retail traders, it seems that the ISA has tarred all aspects of algo trading with one brush

Tal Itzhak Ron, an advocate specializing in the legal aspects of the trading arena as a whole, thinks that the ISA is throwing the baby out with the bath water. “I deeply appreciate the ISA’s protective attitude, though algo trading in practice in Israel is unclear.” Ron says (as do others) that the watchdog, mistakenly, does not differentiate between sub-methods of algo trading, as is done in other countries: “In Cyprus, the regulator addressed the issue and allowed Social Trading and Mirror Trading, two functions very similar to what we call algo trading.”

 

Despite their criticism, Itsik Noy and Advoc. Ron strongly believe in regulation. “Regulation must keep in mind two main things: preserving brokers’ flexibility on the one hand, and protecting investors’ interests on the other,” Ron concluded.

 

The ISA refuses to address any specific enforcement issues. The watchdog’s official comment stressed that in accordance with the legal status that trading arenas in Israel hold, they are allowed to operate without a license only during the transition period, while unlicensed investment management is forbidden. All firms that submit an application for a license are investigated for unauthorized investment management.

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