Israel court overturns algo trading ban at USG Capital

Some good news for Israel based retail forex brokers, or at least those who serve Israel based clients.

Israel business newspaper Globes has reported that the Tel Aviv District Court has overturned a previous decision by the Israel Securities Authority (ISA), which had frozen retail forex broker USG Capital’s algorithmic trading business on the grounds that it was operating without a license.

In coming to its decision, the court accepted USG’s basic position, that providing algo trading services does not constitute providing investment advice.

However the court did impose certain restrictions on USG, with the key one being that it will not be allowed to give training to customers in the algo trading software provided. The court accepted the ISA’s position on the matter, which was that providing training was not consistent with trading by customers being independent, and that therefore the company should refrain from any interaction with customers in relation to the use of the algo trading program, other than the provision of technical support.

Moshe Shalom, USG Capital

Moshe Shalom, USG Capital

The court ruled that the training for which the company sought approval was liable to turn into investment advice, and so would be disallowed.

The implication from the court decision is that companies active in algo-trading will not be required to hold a trading license, as long as they abide buy the limits and restrictions detailed in the decision. It remains to be seen if the ISA will appeal the court decision. Officially, the regulator’s stance remains that anyone who wishes to manage other people’s money via software (or without software) must obtain a portfolio manager’s license.

Globes reported that USG Capital CEO Moshe Shalom welcomed the court’s decision, saying:

This decision represents a basis for future regularization of algorithmic trading and is good news for our customers.

The decision comes amid increased scrutiny and change in the Israeli Forex and Binary Options sectors. A number of populist-leaning newspaper articles and blog posts have recently called out tactics being used by (mainly) Binary Options brokers in Israel. New regulations governing forex and online trading in Israel are set to come into effect in July, including:

  • Banning of all binary options trading.
  • No bonuses or other gifts may be granted to clients.
  • Deposits by clients can be made by bank/wire transfer or credit card only, not by debit card.
  • All brokers must ask clients to view and sign a conflicts-of-interest policy, at least once each year.
  • Leverage limits:100:1 on Forex pairs and Gold trading.
    • 40:1 on Equity Indices
    • 20:1 on all other instruments

However we’d note that most of these changes cover the provision of services to Israel-based clients only. Israel-based brokers (and there are many) can continue to operate as they wish vis-a-vis clients from other countries, without running afoul of local regulations.

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