Algo Trading and the Israeli Securities Authority – on a collision course?
The new regulatory regime in respect of own account financial trading recently came into effect in Israel. This followed a legislative process that took more than four and a half years since the enactment of the relevant primary legislation. This legislation assigned the Israeli Securities Authority with the role of the regulator in charge of licensing of the relevant stakeholders and overseeing the implementation and enforcement of the legislation.
While the ISA is still reviewing the license applications filed, on August 2, 2015 it also issued a warning to the public at large concerning algo trading; that is, concerning various businesses that offer the public, in most instances via the internet, the opportunity to trade in financial products where the trading decisions are taken by automatic robots that operate on the basis of an algorithm.
In light of the increase in complaints received by the ISA regarding this matter, the ISA stated that such services usually require a regulatory license, and that offering these services without such a license contravenes the law. It pointed out that the regulatory requirements in the applicable legislation are aimed at protecting the customers and their money, and to provide various legislative arrangements relating to, inter alia, fiduciary duties, confidentiality, reporting requirements and the prevention of conflict of interest. The lack of the regulatory oversight subjects the customers that trade via these businesses to significant risks that may cause the customers to lose all of their money.
Analysis
If the algo trading industry continues to expand in Israel, it is highly likely that the legislator and the ISA will take measures, whether legislative or administrative, aimed at protecting the public from unlicensed operations. Such measures are more than welcomed and will bring about the expulsion from the market of rogue businesses, that operate in an illicit manner and that do not or cannot protect the funds of their customers. These measures will enable worthy and respectable businesses to increase their market share and provide more than adequate service to their customers. Let us hope that these measures will be taken sooner rather than later.