Service Provider Convicted of Algorithmic Trading in Unlicensed Foreign Trading Platform
Summary
- Installing a “robot” for algorithmic trading and defining its parameters is not deemed a “technological service” but may constitute investment portfolio management, which requires a license. This is because the service provider retains material discretion (choice of platform, transaction volume, profit and loss targets, and risk management), even when the account and funds are in clients’ names.
- A trading platform requires an Israeli license to offer trading to Israelis; foreign licensing and supervision are insufficient. The act of solicitation alone may be sufficient to establish an offense.
- A service provider who misrepresented himself as an expert, promised high returns at low risk, and concealed the fact that he was unlicensed was convicted of fraudulent obtaining of clients’ consent to trade their funds. His risk disclosure documents were deemed insufficient to mitigate the deception.
The District Court recently convicted a private individual on three counts relating to the marketing and managing of robotic trading on an Australian trading platform that is not licensed in Israel. This ruling is particularly interesting because the defendant did not own the trading platform and had no ties to its management. Rather, he acted as an intermediary who referred clients to the platform and installed a robot in their accounts for algorithmic trading in CFDs (contracts for difference).
This ruling demonstrates how Israel’s capital markets laws, the Investment Advice, Investment Marketing and Portfolio Management Law and the Securities Law, also apply to activities presented as merely a “technological service.”
The Defendant’s Actions
The defendant marketed an automated trading system to the public through video clips, a landing page, and paid advertising on social networks. He presented himself as a college-educated expert and experienced trader, promised low-risk returns, and solicited clients to open accounts in a trading platform supervised in Australia but unlicensed by the Israel Securities Authority.
The defendant installed a robot in clients’ accounts, which executed buy and sell transactions according to the parameters he defined.
The court convicted him of three charges: fraud by deception, investment portfolio management without a license (and offering to provide this service), and soliciting trading through a trading platform that is unlicensed in Israel.
Use of a Robot Does Not Release the Defendant from Liability for Unlicensed Investment Portfolio Management
The defendant’s main argument was that he merely provided a “technological service”—installing and configuring a robot at clients’ requests—while the actual trading was carried out automatically.
The court dismissed this argument, clarifying that investment portfolio management includes exercising discretion when executing transactions with third-party accounts, and held that the three indictments were justified.
The court differentiated between discretion and control and emphasized that the key question is: who exercises material discretion? The answer is not who owns and controls the account, but who actually makes the investment decisions. In this case, it is irrelevant that accounts were opened in clients’ names, that clients deposited funds, and that only the clients could withdraw funds. The defendant was the party who exercised discretion and made material investment decisions.
Furthermore, since the defendant defined the robot’s parameters (transaction volume, direction of trading, profit and loss targets, and risk management mechanism), selected the trading platform and the financial instrument, and made ongoing adjustments according to market fluctuations, the court held that he performed material investment management actions and did not merely provide “technical assistance.”
The court further stated that even when clients approved the parameters or partially participated, the defendant still retained investment discretion, since discretion is not contingent upon complete control. It also noted that, in some accounts, the defendant held the password for executing transactions, while clients could only view account activity.
Soliciting Trading in a Foreign Platform Not Licensed in Israel
The conviction for the third charge clarifies an important rule for capital markets participants:
Soliciting trading through a trading platform is prohibited unless the Israel Securities Authority licenses the platform. The fact that the defendant solicited trading in a platform licensed and supervised in Australia is insufficient. Pursuant to Israel’s Securities Law, trading platforms must obtain an Israeli license to engage with the Israeli public. The court stressed that the defendant had already violated the law by soliciting trading, without any bearing on whether clients relinquished free will.
Criminal Aspects of the Defendant’s Marketing Representations
The conviction for fraud by deception was based on three categories of false representation: the defendant’s fictitious claims of expertise and experience, promises of high returns at low risk while concealing the real risks, and falsely claiming lawful activity when the defendant was unlicensed.
The court ruled that this charge was not for money pocketed by the defendant, but rather fraudulent obtaining of clients’ consent to trade with their money, based on false marketing representations, which constitute criminal offenses.
The practical point: The defendant attempted to rely on a risk disclaimer document and a platform suitability questionnaire. The court ruled that these documents do not mitigate criminal liability, inter alia, because they were displayed in small print and in English while the false representations were in large bold print, and because the defendant provided clients with the answers to the questionnaire in order to bypass screening of the trading platform.
A Cautionary Tale for Service Providers Operating in the Online Trading Market
This ruling demonstrates that algorithmic trading activities can give rise to three forms of criminal liability simultaneously: unlicensed investment portfolio management, soliciting trading in an unlicensed trading platform, and fraud.
Even when activities are presented as a “technological service,” a “trading robot,” or “passive investments,” the legality of the activity will be determined by the party who exercises material discretion and makes the actual investment decisions.
Therefore, entities, developers, and marketers engaging in algorithmic trading, foreign trading platforms, and quasi-prop models in the Israeli capital markets should assess in advance whether they require licensing pursuant to the Investment Advice, Investment Marketing and Portfolio Management Law, the legality of soliciting trading through a trading platform pursuant to the Securities Law, and the content of their marketing representations.
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Adv. Avihai Tal is an associate in our firm’s Regulation Department.
Barnea Jaffa Lande is at your service to provide legal advice on the appropriate regulatory structure for your activities.
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