Israel, a long established FX technology hub, has recently seen dramatic changes in the status of its local forex trading industry. After years of operating freely without any regulations, in August 2014 the Israeli Parliament modified the securities regime mandating that brokers marketing to Israelis must acquire a costly new licence. Strict reporting rules, limiting maximum leverage and various other harsh legal requirements are expected by the regulators to push firms out of the local market.
On December 17th, 2014 Isaac (Itzik) Noy, CEO of SmartCapital, was elected as the chairman of the Trading Arenas Association in Israel, the body who represents the industry in front of authorities and is part of the country’s Chamber of Commerce. He replaced Tal Zohar, the former CEO of FXCM Israel, who relocated to London to become a member of IG Group Senior Management.
Mr. Noy grew up in the traditional investing business in Israel, starting from the bottom at Clal Finance and rising all the way to be the manager of the investment house’s sales department. From there he moved to AVA Trade where he worked for two years, getting to know the forex business. In January 2014 he founded SmartCapital as his own brokerage.
We sat down for an interview with the new head of the Israeli industry body soon after he started his term to discuss his plans. The most obvious thing that is important to him is the issue of lack of transparency in the Israeli industry. On his firm’s site his name and photo appears prominently and he emphasizes that every client and prospective client can come in to the office at any time for support.
The biggest problem in the Israeli industry according to Noy’s view is that in the past many saw forex as a get-rich-quick scam, both traders and brokers, and that people set up firms with no regulation using high pressure tactics to bring in deposits and make people lose them to the B-Book with overleverage.
“Some salespeople did not even mention who stands behind the firms, where are offices located or any information to identify the legal entity. After a year or so of raking in cash, some firms will just disappear entirely.” This he says has led to the “demonization of forex” where brokers and investors were afraid to be associated even with the word “forex” due to all of the negative connotations.
In Noy’s view the Association and the Israeli forex industry must become a “beacon of transparency” that firms around the world can learn from in order to bring back Israeli traders that have been “burnt by charlatans” before.
Arm of the Law
Mr. Noy says he welcomed the new law and intends to serve as the long-reaching arm of the Israeli Securities Authority (ISA) in the world of forex. The regulators cannot understand all the aspects of the online trading business because this is not their focus. He explained, “the association will act to police the industry on behalf of the public.” He believes “taming the jungle” that existed in Israeli forex will only help reputable brokers.
Noy says that until now many international firms signed deals with local players, usually former salespeople, to serve as introducing brokers without any regulation. Under his watch this will not be allowed to occur. The Association will report to the police any IB that will try to operate under the radar. “Foreign brokers will not be allowed to operate in Israel, targeting Israeli clients, without proper license and compliance in the country anymore.”
Asked how can the Association stop some brokers located offshore from targeting Israelis, Noy says that they will work with banks to identify funds leaving the country for trading and that they will address local authorities in every jurisdiction from which Israelis will be targeted and act against individuals involved with the help of Interpol.
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The cost to open an Israeli regulated forex branch he estimated to be around $2.5 million, but will now require even more compliance costs and supervision for market makers and binary options.
As for Israel-based firms targeting clients in countries that they are not regulated to operate in, Noy says his mandate does not cover them but he will advise them to seek licenses in any jurisdictions they operate in, and that if any foreign regulator will turn to the association to help locate an unregulated broker operating out of Israel, they will gladly help.
According to Noy, the association will set a list of standards, beyond the requirements of the securities law, which arena members will have to live up to in order to get a seal of approval from the body. Brokers with the seal of approval will be presented to the trading public in the association’s publications featuring advice and guidance on how to select a broker, trading system, appropriate leverage and an algo copier.
The Association is also setting up a mediation body for client complaints about brokers. Until now clients that felt they were duped had to turn to the courts for help. The judges, however, have no way of knowing if there was a real issue, Noy explains, like brokers intentionally freezing the platform or pressuring to open an overleveraged position, versus if the trader simply did not know what he was doing or lost his money due to his own negligence. In the new mediation body, a lawyer, an accountant and an industry expert will review complaints and solve them in a timely manner saving many troubles for the traders and brokers alike.
Beyond platforms, Noy sees the establishment of rules and supervision for algo trading as very important to the development of the field. He says he has witnessed clients being shown deceptive results, basically only shown closed positions, not the floating losses, and has plans to make the practice much more transparent and simple to understand.
Going Beyond Retail Trading
Once the Israeli public will see that there is a “new sheriff in town” and that forex is becoming a legitimate investing option, Noy expects the industry to flourish. He estimates that it would take between six and eight months to counter the demonization of forex and bring back many retail Israeli investors that shun the market now. But the capacity is much higher than that.
Noy envisions institutional businesses, long held by the trading desks at the major Israeli banks, to turn to the industry for an alternative to the high costs of trading with the banks. He plans on his experience helping bring investment houses into trading via arenas and algos. If that will happen it will be a serious game changer that will increase trading volumes tremendously.
In Noy’s own firm, he is working to introduce structured products, as are common in the hedge funds world, to his clients. He says that if a client manages his own trading and his automatic trading with a broker there is no reason that he won’t want to try different options for diversification. One example he gives is microfinance, where Israeli investors will buy into an instrument that is based on many short term small cap loans in Europe, getting higher returns than the banks offer.
In the farther-off future his vision is even greater. He thinks that with the fast, transparent nature of online trading, the old ways of doing business will have to change. He expects that traditional Israeli investment funds and even ETFs might disappear from the local market within ten years due to the ease of just following a strategy online.
The Israeli forex industry can benefit greatly from such a sea change, if it is indeed possible, and Noy’s bold determination will definitely be needed for it to occur.