CFTC - Dynamic Trading System = Providing Trading Advice

This is the heart of the issue... Even a licensed program sold to and operated by the client inputting their positions is deemed by the CFTC as the software creator providing trading advice if the software calculates and recommends trades. A slippery slope.

 

Here you probably need legal advice.

There are a large number of trading platform vendors that can suggest (and even execute) trades for the client but they don't come as a trading system but as a platform. Most platforms come with sample trading systems that actually can suggest trades based on the previous executions and the state of the account. These usually have parameters determined by the user and/or come as source code (it's analogous to Microsoft selling Excel and providing free sample financial advise spreadsheets).

Further, independent vedors distribute indicators and trading systems for these platforms and those don't normally constitute investment advice either. Contractors code a specific algorithm (say, something published in a trading magazine) at the request of a client and this is most certainly not investment advice.

There should be a reasonable border where you can say: this is investment advice and this is just software.

 

Right! Ultimately it is the user who determines the actual trades.
User code or parameters, is always a way to provide the user (by more or less flexibility) with just a software which allowing him to determine his own trades.

And even if a black box had no parameters, there is always an implicit one: turn it on/off, which again makes the user to determine the results )

Tom

 

There is nothing ambiguous about CFTC rules you must meet both provisions for exemption.

Exemption From Registration as a Commodity Trading Advisor 17 CFR Part 4

The Commodity Futures Trading Commission has amended Commission Rule 4.14 to create an exemption from the Commodity Exchange Act’s registration requirements for commodity trading advisors that provide standardized advice by means of media such as newsletters, prerecorded telephone newslines, Internet web sites, and noncustomized computer software.

The exemption is expressed in negative terms: the rule exempts CTAs that are not engaged in the types of advisory activities specified in the new paragraph. A CTA must meet both of the specified conditions to qualify for the proposed exemption. Paragraph 4.14(a)(9)(i) provides that, to quality for the exemption, a CTA may not direct client accounts.

Paragraph 4.14(a)(9)(ii) also provides that, to qualify for the exemption, A CTA may not provide commodity trading advice based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients. A CTA that provides this kind of advice carries out a function comparable to that of a traditional professional.

Moreover, so long as the CTA’s advice is based on or tailored to such information, the CTA remains required to register even if it gives the same advice to groups of similarly situated clients.

The medium through which advice is communicated is, for the most part, not relevant to whether the CTA can be said to be exercising judgment on behalf on the client in the light of the client’s individual needs and circumstances.

‘‘the new rule * * * should emphasize that the exemption is based on the nature of the advice that is provided, regardless of how it is communicated to the client.’’ As explained by the district court in Taucher, ‘‘n today’s technologically advanced society a professional can exercise judgment on behalf of another without ever having ‘personal’ [or direct] contact.’’

The Commission intends that a CTA who manages a client’s trading under some type of informal arrangement be required to register even if the CTA is not authorized to effect transactions without the client’s specific authorization, and therefore does not ‘‘direct’’ the client’s accounts.

H. A CTA monitors a client’s trading positions and amount of margin in the client’s account. Based on that information, along with general technical and fundamental market information, the CTA gives the client commodity trading advice. Because he provides commodity trading advice ‘‘based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,’’ this CTA is not exempt from the registration requirement under Rule 4.14(a)(9)(ii).

 

So does this mean that any vendor selling an ATS or forex robot that has an awareness of the users' positions, account size, or margin is in violation of these regulations? For example if a robot determined position size based on account size or available margin, or had a setting to stop trading after a maximum amount was lost...