If a C2 system creator purchases a stock with his personal brokerage account, and then issues a buy signal for that stock to C2 system subscribers, has he committed a crime?
I have spent hours researching the subject, and it is difficult to find a clear answer. It appears to be illegal because the system creator is benefiting from "material nonpublic information".
One way you can prevent even the appearance of impropriety is the AutoTrade your own system, rather than trading your system separately and buying stocks before you publish signals. That way you trade alongside your subscribers, rather than in front of them.
What regulators would look askance at is a systematic pattern of gaming your trades by continually buying stocks pre-emptively in a personal account, and then issuing signals that cause the price to move after you already own it.
That would be no easy feat, however. I think it would require a C2 system with thousands of AutoTraders (there is currently no such system, alas) or a stock with a tiny daily trading volume (not very easy to AutoTrade in any case) to make such a scheme work. I suppose it’s possible, but not very likely; and I’m pretty sure any bad actor attempting such a scheme would ultimately lose money rather than make it.
But still. Your point is valid, and it’s important to avoid even an appearance of impropriety, even if you have no intention of behaving badly. So what is a system developer to do? Realistically, I doubt anyone could object if your trading system issues hundreds of signals each year, and in two or three cases your IRA account already happens to own a stock for which your system issues a buy signal (particularly if it has owned that stock for some time). More problematic would be a case where your personal trading account always seems to buy stocks immediately before issuing signals to your subscribers.
As always, common sense and regular decency will be the best policy.
Matthew
Of course, if s/he does it because of special information known only to those inside the company. (A major flaw in the manufacturing process that will impact q3 revenue for example) But if s/he does it due to an indicator in his software, which he developed, that would not be the case.
Mike, is this a Halloween question that is supposed to scare people? It is almost as scary as the children that will ring my door bell.
You make an interesting point. If such an event ever happened and regulators investigated im sure it would be classed as front running. However, as mentioned, its very unlikely to happen due to liquidity vrs subscribers.
I would like to autotrade both of my stock trading systems, ETF GLOBAL TIMER and ETF VOLATILITY TIMER, however, C2 makes you use only one broker, MB Trading, for this.
I’m not a big fan of MB Trading and, therefore, I don’t autotrade either system.
If C2 expanded the autotrading brokers for stock systems, preferably thinkorswim/TD Ameritrade or Fidelity, I would be the first to sign up for autotrading with either of these brokers.
I’m sure that most stock system developers feel the same way. So if Matthew’s really serious about expanding autotrading by system developers, especially for stock systems, he has to give us more alternatives that just one broker to use.
[LINKSYSTEM_81055844]
ETF -
Vision is a second broker that also supports stocks and ETFs. My suggestion is, if you want to put your money where your mouth is, and trade your own system in a verifiable way, choose one of the two brokers available to USA clients, and trade it at one of those brokers through C2.
MK
Matthew,
Here is the excerpt from your "trades own system" tab on your C2 site for system developers:
"If your system trades…
Brokers you can use
Forex
FXCM-USA (BulldogFX) Go to site FXCM-UK (BulldogFX) Go to site
FXCM-Australia (BulldogFX) Go to site
Gain Capital (BulldogFX) Go to site Gain Capital UK (BulldogFX) Go to site
Futures
OpenECry Go to site Interactive Brokers
(Bulldog Futures) Go to site
Stocks
MB Trading Go to site
Options
MB Trading Go to site "
I only see MB Trading for stock systems. If there is another broker available, please update your website to reflect this with a link to the broker, so I will be able to check them out. Thanks!
[LINKSYSTEM_81055844]
it is just wrong and most likely illegal
Matthew, thanks for the detailed response! I agree with your viewpoints, and I agree that a regulator would probably frown upon this behavior.
However, I am still not sure what exact law is being broken if this is indeed illegal. I have reviewed several laws that discuss front running, such as the “Securities Exchange Act of 1934”, the “Investment Company Act of 1940”, and FINRA Rule 5270. None of the laws appear to apply to me, because I am not a broker, dealer, or FINRA member. What am I missing?
Mathew, I remember reading somewhere that you suggested that C2 systems were treated like “newsletters” by regulators. If it is OK for someone to buy stocks and then send out a newsletter recommending those stocks, then isn’t it OK to do the same with a C2 trading system? When news articles recommend stocks, I notice that they usually have a disclaimer that indicates that they own (or don’t own) the stock. Does this mean I simply need to include a disclaimer at the bottom of the C2 system description indicating that I already own the stocks?
I don’t want to make assumptions on why the list of online brokerages for Auto Trading is small. But it could be due to the fact that not all online brokerages offer an API to place trades via code or a 3rd party application.
MB Trading offers a very extensive API into their trading platform which is why we are able to Auto Trade MBT. As do a few other online brokerages. As far as I know, places like Fidelity, TD Ameritrade, etc do not currently offer this service. One brokerage that I would love to see on here that does have a public API is OptionsXpress, which is now owned an operated by Schwab.
-Ryan
Hi.Everybody, anyone who would care to help the newcomer, my name is Bens, I am exploring automated trading for the 1st time. I would like your opinion as to how well this system operates and any other information that she would care to share that with assist me in making a decision. I thank you in advance for helping me
