Thanks for the site, it looks great!
My question is on the ‘frequent questions’ page where it says I do not need to register with the CFTC or SEC - can this information be verified outside of C2? I like what you have done here, but I am one that likes to see this information on the CFTC or SEC website before assuming.
Thanks & I will look forward to an links you can post for me!
Matthew,
Thank you for the link to the site.
I am curious to hear your thoughts on this site:
http://www.sec.gov/investor/pubs/autotrading.htm
Any system provider here is obviously providing the ability to have their trades auto-traded and in this article from the SEC (granted, they may not have jurisdiction in futures, but they are king in stocks and options) the SEC says "Generally, the SEC considers firms that publish investment newsletters and that also engage in auto-trading 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."
According to this SEC publication, it sounds like if you have a newsletter than can be auto-traded, you better register with the SEC as an ‘investment advisor’.
Is there a potential legal issue here if you are providing a service that can be auto-traded, ie Collective2, and are not registered with the SEC?
Thanks!
Jim
Jim
You are pulling bits and pieces out the sire you listed to try and prove a point for some reason. In doing so you conveniently ignore the definition of auto-trading from the SEC. If you read further, it is stated:
"In an auto-trading program, you establish an account at a brokerage firm that has agreed to accept trading instructions from the investment newsletter. In order to allow auto-trading 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.
Auto-trading, like any other arrangement that allows someone else to trade in your account without first asking your permission, can be highly risky…"
Auto-trading via C2, is YOU receive the signals in TradeBullet and YOU send the signals on via TradeBullet which is connected to your broker with YOUR user id and password. The URL above clearly state that under their definition of auto-trading you give someone else access to trade your account.
This is not what happened here. You do not give your broker permission to accept trades from C2. All you do it place trades to your own account using TradeBullet. TradeBullet is just another frontend to your broker via which you access it. This is nothing different than a daytrader using NinjaTrader for example to place their orders. You do not give someone else access to your account to trade for you.
I am not sure what you are trying to accomplish here, other than trying to cause trouble where there is none. If you don’t think this is legal, or agree with what C2 is doing, then just don’t use C2.
Chris
Chris,
I’m glad to read that this cannot spoil the fun we’re having here, but I don’t think that Jim’s questions are necessarily motivated by ‘trying to cause trouble’.
My first reaction to the link that Jim posted was exactly what Chris wrote (that Jim ignored the part about trading on your behalf / power of attorney which clearly dont apply here).
However TB is rather unique, even though it is running under your control you really arent in control while its happening (e.g. either you are letting it autotrade in which case trades happen too fast for your to make a decision to accept/reject the trades or you have turned it off).
At first blush, I would guess that having the software run on your PC under your control would make the link that Jim provided irrelevent but I think its far from a slam-dunk case. In some respects, running TB linked to C2 is a technological equivalent of a power of attorney for the system provider.
That being said I’m sure that MK has consulted with an attorney (more than once) before setting any of this stuff up, lest he open himself personally to any lawsuits that may result,
Chris,
How about you settle down, geez.
I just want to know that the proper due diligence was done here before subscribing or offering a system. Just because the website looks nice and Matthew seems to be a great guy doesn’t mean it is in full compliance with the LAW. I am NOT saying there is a problem here, but I’d like to know for sure there aren’t any issues that someone just forgot to ask…
As for C2 being classified as ‘auto-trading’, maybe the trades come through your computer and then a broker, but I am sure if you asked the SEC what they thought, they’d say this is clearly auto-trading. Take a look at the ‘auto-trading forum’ right here on C2. If you are not auto-trading, why is the forum called ‘auto-trading’?
I’ll look forward to Matthew’s reply since his site clearly says no additional registration is needed, yet I believe the SEC article may imply otherwise. If you are a system vendor you may want to investigate this yourself.
-Jim
I think there are a few separate issues here.
The term “auto-trading” is nebulous, and means different things to different people. At C2, AutoTrading means: You run a piece of software on your own computer, and that piece of software places trades according to various parameters you set. System vendors don’t control this software directly, and – in fact – they don’t even know who is autotrading and who is not.
I think the SEC is “warning” about a different kind of AutoTrading, in which you give a third party Power of Attorney or Trading Authorization to place trades directly in your brokerage account without your explicit permission. In that kind of autotrading, the trade instructions don’t even bounce into your own computer. The system vendor places a trade directly at the broker.
Now, I’ll be the first to say that there is a spectrum of gray between the two scenarios, but I think reasonable people can pretty easily differentiate between the two: In one scenario, you are effectively trading your own account, but you use a piece of software to help you do so. (C2 doesn’t even know your broker account, password, or – for that matter, which broker you use! It’s all under your control). In the other scenario, you give a third party formal, legal permission to follow instructions emanating out of someone that is not you. That second scenario is not followed here. All trading instructions going into your broker account effectively come from you. No Power of Attorney is given. No formal Trading Authorization is granted to anyone. You place your own trades.
C2 feels comfortable offering AutoTrading, and we have no reason to believe that system developers need to register as investment advisors. But if you feel uncomfortable being a system vendor, then by all means, don’t do it.
MK
I recently registered as an investment advisor in the state of Vermont (and took the Series 65) so I am familiar with the SEC rules regarding this.
There are a few cases which differentiate ‘publishing signals/information’ from ‘giving investment advice’. It is my opinion that system vendors on C2 are NOT required to register as investment advisors (in the US - I can’t speak for other countries) because:
They do not tailor signals to individual subscribers
They do not have trading authority for client accounts
They do not ‘take control’ of client funds
They do not generally hold themselves out to be financial advisors
They do not charge a fee based on a percentage of client funds being traded
The fact that a subscriber can automatically send published signals to a brokerage account is not directly relevant since this is not under the control of the system vendor.
Hope this helps
Paul King
PMKing Trading LLC
www.pmkingtrading.com
Paul,
I agree with your post completely. My question/concern stems from this quote from that SEC publication:
"Generally, the SEC considers firms that publish investment newsletters and that also engage in auto-trading 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."
Since you recently became an investment advisor, how would you respond to this? Again, I think the concern here is the ‘auto-trading’ part. Your points in your post are valid and if the services stopped there, I don’t think there would be an issue.
I appreciate the meaningful posts here and thank you Matthew for sharing your thoughts as well. I’m not sure why persons like Chris Morse feel the need to act immature, but it is nice to know there are some regular people around here.
-Jim
Paul,
Also, I am curious - why did you become registered? Was it due to your involvement with C2?
Thanks,
Jim
I became registered so I can provide financial advice to clients (this was completely independent to publishing trading signals on C2).
Paul
Jim,
One has to look at who is doing the auto-trading. If your client gives YOU access to their brokerage account and you run a C2 or TradeStation or TradeBullet system (for example) in it for them, then you are (auto-)trading on their behalf and you must be registered as an investment advisor (or whatever registration for the instruments you are trading if they are not securities).
If, on the other hand, you give (or sell) them a system (or system signals) and THEY execute it in their own brokerage account completely independently of your control, then you are not (auto-)trading for them and no registration is required.
Hope this helps
Paul
Another point is that the trading signals from the vendors can be managed completely independent of “autotrading” by entering the orders manually using either ITM signals, or email notifications (although this isn’t always practical because of the time delays). Autotrading just facilitates getting the orders placed at the subscriber end of the pipe, but it does not alter anything the vendor does at his end. The vendor sends his information to C2, who then sends it out to system subscribers via ITM, email, or makes it available to Tradebullet (which the subscriber sets up himself), and the vendor has no idea whether someone is “autotrading” or not. Autotrading here just means that the orders are automatically placed by software instead of being manually placed by the subscriber.
And finally, if you look at the SEC Web site and look at one of their legal complaints against a particular company, the way they describe “autotrading” in the complaint is that the defendant was given legal trading authority over an account.
That does not happen with C2 AutoTrading. You retain full control over the brokerage account, you never share brokerage information with the vendor, and the vendor is not even aware that you are autotrading.
Hi Randy, I don’t disagree with your conclusion but I do not think the fact that you can also receive the signals manually from a vendor is relevant; meaning if someone offers managed accounts and also offers a service to send the signals to you by email for manual trading, that does change the fact that the managed accounts are regulated by the SEC, it just means that the emailed signals are not.
I also think the line is a little blurry, while the provider may not know whether any given subscriber is in fact autotrading via C2/TB the fact is that they type some strokes on their keyboards and as a direct result and without any user interaction trades are made in client accounts. That seems to walk pretty close to the line to me.
The fact that C2 and TB are provided by separate people also throws a wrench in the works but I think that just distracts from the issue and really for purposes of the discussion you can treat C2 and TB as a packaged autotrading offering since that is how it is presented here (the fact that TB isnt owned by C2 shouldnt matter).
Again, I’m just throwing my comments out for discussion because I do think this is an interesting thread although I think there are enough differences between C2/TB autotrading and a managed account to steer clear of the cited SEC regulations.
Hm thinking about what you write, I think you have a point Pete. I’m not a US citizen, but it is my understanding that the SEC will primarily try to protect individual non-professional traders (like me) against themselves with all kind of annoying regulations. Then the C2 autotrade concept is practically not very different from the SEC autotrade concept. There is a legal difference, but I would not be surprised if, in the future, the SEC would try to bend the rules such that they apply to C2. E.g. see the events with Hawk Fx. If this kind of things happens often, and lots of people loose money and become angry, it is unlikely that the SEC would stand aside and do nothing.
To prevent this, I believe it would be wise if C2 gradually develops a more active attitude in the protection of TB users. For a start, as has been suggested by others, system vendors should be obligated to describe for each sytem clearly (1) whether it is 100% computerized or not (2) how strict the risk management rules are, and (3) whether it is suitable for TB autotrading. Furthermore, vendors who violate their own rules should know that they will be banned - or at least will be marked somehow as ‘unreliable’.
I know that C2 has already warnings about possible malicious vendors, but I think this will not be enough in the future, when the number of users increases.
Jules
Jules,
I could not have said it better myself. You are correct - the SEC ultimately is trying to protect the average ‘Joe’ and will sometimes implement ‘interesting’ rules to do so. Your example is perfect actually - if enough people put up a fuss about Hawk-fx and this website called ‘Collective2.com’ it could get on someone’s radar screen.
Once again, great post. I hope Matthew reads what you wrote.
-Jim
I should also add - I was speaking with a good friend in the brokerage business and he told me this SEC ruling applies very much to stock and option traders as the SEC governs there.
As for futures and forex, it may not apply directly, but caution is recommended.
-Jim
