Meridian Lawyers has had a number of inquiries in relation to copy, mirror or shadow trading, forex signal trading and binary options trading and its regulation.
Copy trading allows an investor to directly copy the positions taken by another trader and connect a part of their portfolio to the client/investor and thus to copy all of the trader’s current positions on the market, and any action they make going forward. Investors may set proportions between their account and the copying trader or may also disconnect their funds and manage their own investments, closing the relationship.
Forex signal trading allows a client/investor to automatically copy the transactions performed by other traders in real time. A forex signal is a signal is generated either by a human analyst or an automated robot, for entering a trade on a currency pair, usually at a specific price and time. Many successful traders provide public access to their forex trades either for free or for a reasonable fee, becoming signal providers.
Binary options are a type of option which allows a client / investor to invest on the basis of a prediction of the short-term movements of a share price, currency, index or commodity. Binary options are also called ‘all-or-nothing options’, ‘fixed return options’ or ‘digital options’. The payoff is either a fixed amount or nothing at all. Most binary option providers operate through online platforms.
Regulation – Binary options trading
In August 2017, ASIC reported on a review conducted earlier in March, identifying 330 apps which were offered to Australians by entities and individuals that appeared to be unlicensed:
- 63% from binary option issuers and facilitated trading
- 25% from signal providers
- Remainder controlled by introducing brokers.
ASIC also identified other potential regulatory breaches by binary options providers:
(i) misleading representations about the profitability of trading and profit outcomes
(ii) failure to outline the risks of trading binary options (80% had no warning)
(iii) misleading information by introducing brokers implying that they were issuers and failure to properly disclose compensation for referral business
(iv) binary option review/education sites collecting personal information for use in high-pressure cold calling by casino, lottery, forex and binary option service providers.
ASIC considers that binary options are a financial product based on the underlying market or asset price moving in a certain way before the binary option expires. Accordingly, a binary option provider must have an Australian Financial Services Licence or be authorised by an Australian Financial Services Licensee.
Regulation – Copy trading
Sharing of investment information and copy trading signals has been exponentially facilitated by technology, trading platforms and the wide scale utilization of social and online networks.
There is no clear regulatory guidance on copy trading in Australia and the application of the financial services regime will depend on the signal trading model.
However, as an indicator, in the UK, the Financial Conduct Authority views a copy trading model as constituting portfolio management and FCA authorisation will be required where:
- there is no manual intervention from the client; and
- the investment discretion is exercised by automatically executing the trade signals of third parties, as agreed upon under a client mandate.
In Australia, whether a copy signal trading platform or model constitutes financial services activity requiring an AFS Licence will depend on the configuration of the model. However, based on the UK regulatory requirements, indications are that ASIC will require operators to hold an AFS Licence unless they qualify for an exemption.
Regulation – forex signal trading
ASIC recognises the inherent risk and complexity of foreign exchange trading and as a consequence forex trading is highly regulated, including the operation of client accounts.
There are a number of examples where ASIC has acted to prosecute unlicensed or unauthorized providers of foreign exchange (FX) signals, including models where client investors purchase memberships in a service where signals are automatically executed on members’ trading accounts.
ASIC has expressly publicised that business models which use trading software to automatically execute trades in foreign exchange contracts on client accounts without instructions for each transaction are likely to constitute a Managed Discretionary Account (MDA)
ASIC considers that operators of an MDA must:
- hold an appropriate AFS Licence; and
- comply with several class orders setting out how MDA services for retail clients must be operated.
ASIC recently contacted Apple and Google to remove a number of unlicensed binary option mobile apps from their app stores. In addition, Apple recently changed its review guidelines to prohibit apps that facilitate trading in binary options.
Meridian recommends that before initiating or developing any signal trading model, developers or proposed issuers of signal trading ‘apps’ should ensure that their business plan incorporates a regulatory review in order to ensure compliance with the financial services regime or to otherwise structure their model within acceptable regulatory exemptions.
If you have any questions relating to issues raised in this article, please contact Michael Bracken, Principal.