Is autotrading legal?

brownsfan019 · May 17, 2007

stocks - autotrading by definition is: A trading strategy where buy and sell orders are placed automatically based on an underlying system or program. The buy or sell orders are sent out to be executed in the market when a certain set of criteria is met.

Some investment newsletters provide an autotrading feature where, based on the newsletter's recommendation, an order to buy or sell a position is sent to the subscriber brokers automatically.

http://www.investopedia.com/terms/a/autotrading.asp

In C2's case (which I would learn how it works before trying to make comments on it...) a person can purchase a subscription to a service. If they chose to, they can also autotrade that service if there's a broker willing and able to do it. The person does nothing other than monitor the positions if they chose. The person does NO analysis or anything, they just tell the broker - do whatever he says to do.

Therefore, as we've attempted to share with you, this is auto-trading. This is where there is some concern regarding the SEC's view on this type of trading.

Again, take the time to educate yourself before you start flying off in a tangent when you literally have no clue what you are even talking about. Great way to start your time here at ET! Although you may fit right in with some of these threads....

stocksonly · May 18, 2007

Quote from brownsfan019:a person can purchase a subscription to a service. If they chose to, they can also autotrade that service if there's a broker willing and able to do it. The person does nothing other than monitor the positions if they chose. The person does NO analysis or anything, they just tell the broker - do whatever he says to do.

Could someone clear up in my mind HOW this can be done automatically? WHO makes the execution decision? Some computer? That places a buy order for HOW many shares? How does the computer know to buy 100 shares or 10,000 shares of the poistion?

Or is there a HUMAN someplace in the chain of events here? (your personal broker perhaps?) A person who makes a decision on the number of shares to buy from zero to 10,000 shares, perhaps based on available cash, if any, in the account?

Does the newsletter KNOW if the autotrading is active?

Does the subscriber have control to turn autotrading on or off at will? Does the subscriber set to "level" for example buy $10,000 of each position or perhaps by $100,000 of each position?

I'd bet the answer as to WHO, if anyone, must be registered would lie in the answers to the above.

GTS · May 18, 2007

Quote from stocksonly:
Could someone clear up in my mind HOW this can be done automatically? WHO makes the execution decision? Some computer? That places a buy order for HOW many shares? How does the computer know to buy 100 shares or 10,000 shares of the poistion?

Or is there a HUMAN someplace in the chain of events here? (your personal broker perhaps?) A person who makes a decision on the number of shares to buy from zero to 10,000 shares, perhaps based on available cash, if any, in the account?

Does the newsletter KNOW if the autotrading is active?

Does the subscriber have control to turn autotrading on or off at will? Does the subscriber set to "level" for example buy $10,000 of each position or perhaps by $100,000 of each position?

I'd bet the answer as to WHO, if anyone, must be registered would lie in the answers to the above.

As someone who has done some autotrading with C2 I am qualified to answer these questions.

There are multiple avenues for autotrading with C2.

One option is TradeBullet, a piece of software that runs on your PC that acts as a conduit between your C2 subscription and your brokerage account (that TB must support). Once configured, everything is done automatically - it does not pop-up and ask if its ok to place a trade. When the vendor you subscribe to generates a signal, the trade is made in your account nearly instantaneously (at least that's the goal).

When you configure autotrading at C2 you can control the scaling of the trades and even limit what types of products are traded (to make sure that a vendor that provides stock signals doesnt try to place a futures or forex trade in your account).

The mechanism of placing orders in your brokerage account is two-way communication - meaning C2 does know that the autotrade order has been placed and even more importantly knows when you order has been filled. C2 does this to determine how much real-world slippage is occuring with autotrading and so that a vendor can't cancel a standing limit order once a customer has been filled.

That's tradebullet, there are also other options that do not involve the subscriber running software in the middle, BulldogFX is a FX autotrading platform where the trade signals go directly from C2 to your FXCM account without any user involvement at all (they don't cross your PC, you don't run any software).

As with all autotrading, you can specific trade scaling and limits but these are global settings for the subscription, you cannot micromanage trades on a trade by trade basis. Similar options are available for stocks and futures trading as well.

Read all about it : http://www.collective2.com/cgi-perl/session.mpl?displaypage=robotOverview.sessionhtml

So to answer your question, once C2 autotrading is configured/setup, the only human involved in the process is the vendor who is supplying the trade signals - everything else is completely hands-off/automated (although the subscriber can always pull the plug, either by shutting down tradebullet or revoking trading permissions for a vendor via C2)

Of course that assumes the vendor is manually entering the trade signals. Since C2 has an API for that its quite possible that some signals are being generated by a computer program, sent to C2 via the API in which case there is no human involved (at the trade level) at all.

stocksonly · May 18, 2007

GTS, Thanks, that was enlightening!

Puts a clearer light on the summary I saw on that link you gave: When you subscribe to a system, you receive the latest trading advice by email, Instant Messenger, or cell phone. But you must place the trades at your broker by yourself. In contrast, when you AutoTrade, trades are places automatically at your broker -- at quantities you are comfortable with.

As a corollary, the classic newsletter registration requirement was if you sent out 2,000 recommendation to your subscribers to buy IBM @$XXX, That required no registration. But if one subscriber contacted you and admitted he executed every trade from the newsletter anyway, and geez, could the newsletter just place the orders for him. THAT required registration with SEC.

If C2 says they are not registered, perhaps they have some legal entity structuring set up to isolate the newsletter picks from the execution procedure. I'd guess that they MUST be doing this as the liability issues alone are unbelievably high for bad picks, bad timing for the picks and execution failures.

But a simple unrelated party entity structure between the recommendations newsletter and the interactive software that utilizes the recommendation might be enough isolation to pass muster.

I'd take a close look to the disclosures and agreement forms and it might be found that these two functions are not performed by the same legal entity and probably not even owned or controlled by related parties.

--------------------------------------

I looked a little more to see what I could to either prove or disprove my thoughts above, and here it is found at: http://www.collective2.com/cgi-perl...297983537295243&displaypage=risks.sessionhtml

Collective2 does not offer its own trading advice

Collective2 Corporation does not offer its own trading advice. Instead, we provide a Web site where users may search for trading advice, and where vendors of trading systems or trading advice may offer it to the public.

GTS · May 18, 2007

Quote from stocksonly:

I'd take a close look to the disclosures and agreement forms and it might be found that these two functions are not performed by the same legal entity and probably not even owned or controlled by related parties.

If I understand your question right, you are asking if C2 and the autotrading mechanisms are owned by the same person.

TradeBullet is not owned by C2, it is independent software (I believe Francis, TB's developer, has posted here in the past) : http://www.tradebullet.com/

AFAIK, all other autotrading avenues are independent as well, C2 provides the autotrading API - that's all.

stocksonly · May 18, 2007

Quote from GTS:all other autotrading avenues are independent as well, C2 provides the autotrading API - that's all.

Thanks, again (BTW by the time my re-edited post got re-posted up you had replied).

IMO, since the autotrading software does not give recomendations, there's no need to register as would an investment advisor.

I can see people debating the issue due to the newness of the technology. But as an example of technologies used to trade - an agrument would be that if registration of C2 or TradeBullet software is required because they facilitate the execution of trades, well then the Telephone company sould be registered with SEC too since the phone lines also facilitate the execution of trades.

The difference is we now take the "magic" of the telephone for granted.

GTS · May 18, 2007

Personally I don't see any basis for suggesting that C2 or the autotrading software/mechanism providers be registered.

I could see the case for the C2 subscription providers needing to be registered because with autotrading they have the ability to directly place trades in subscribers accounts without any manual intervention which is what my understanding is the definition of "autotrading" per the SEC : http://www.sec.gov/investor/pubs/autotrading.htm

In an âauto-tradingâ program, you establish an account at a brokerage firm that has agreed to accept trading instructions from the investment newsletter. In order to allow âauto-tradingâ in your account, you must sign an agreement with the broker authorizing it to accept trading instructions directly from the investment newsletter and to execute trades in your account without first getting your permission. The broker will make trades in your account without consulting you about the price, the type of security, the amount and when to buy or sell.

âAuto-trading,â like any other arrangement that allows someone else to trade in your account without first asking your permission, can be highly risky. Here are some steps youâll want to take to check out an auto-trading program, before you hand over any money:

Check Out the Newsletter â Find out whether the firm thatâs selling the investment newsletter is registered to do business as an investment adviser. You can do this by visiting the SEC website and clicking on the words âCheck Out Your Broker or Adviser.â Generally, the SEC considers firms that publish investment newsletters and that also engage in âauto-tradingâ to be investment advisers. If you cannot find proof that the firm is registered as an investment adviser, please let us know by using our online Center for Complaints and Enforcement Tips.

It seems pretty clear cut to me that this is exactly what C2 offers, I don't understand why C2 subscription providers that allow autotrading don't have to be registered.

stocksonly · May 18, 2007

Quote from GTS:I could see the case for the C2 subscription providers needing to be registered because with autotrading they have the ability to directly place trades in subscribers accounts without any manual intervention

GTS, if I may restate my "argument": the SEC correctly says "In order to allow âauto-tradingâ in your account, you must sign an agreement with the broker authorizing it to accept trading instructions directly from the investment newsletter and to execute trades in your account without first getting your permission."

As I see the situation here none of the recommendation newsletters directly send trading instructions to a broker. Matter of fact, it seems that possibly the newsletters may be totally unaware if anyone uses their advice or not. Rather it is the separate entity, independently owned and operated by unrelated parties that provides a service to allow the investor himself to make decisions and communicate newsletter recommendations (as automated as it may be, utilizing the software application) to the executing broker.

ginux · May 18, 2007

forget it. i've contacted SEC about this matter. let's just wait for the reply.

We're trying to protect the publishers' asses here. If someone complain to SEC about this, the one's who going to get most of the blame is the system publisher, not C2

brownsfan019 · May 18, 2007

Quote from ginux:

forget it. i've contacted SEC about this matter. let's just wait for the reply.

We're trying to protect the publishers' asses here. If someone complain to SEC about this, the one's who going to get most of the blame is the system publisher, not C2

qin - make sure to share with us what the SEC tells you about this. Could get interesting as this thread has shown.