(2) A computerized system that provides the customer with the opportunity to trade through a system as stated in paragraph (1)"
Section 44B is found in Chapter G3 of the Securities and Exchange Law, which deals with trading platforms, which are computerized trading platforms that allow investors to trade with them in derivative financial instruments. Chapter G3 was added to the Securities and Exchange Law in Amendment 42, which came against the background of the existence of trading arenas that enabled investors to trade with Arena activists in various financial assets through designated websitesthat continuously quote prices for securities in which the Arena offers to trade, whilethis activity did not receive a clear response in the law (Explanatory Notes to the Securities Bill (Amendment No. 40) (Merchant's Arenas for His Own Account), 5770-2010, Government Bill 491, March 4, 2010, p. 540).
It should be emphasized that one of the significant difficulties in the "trading arena", which raises the need for increased supervision and enforcement, lies in the fact that unlike investing in the stock exchange, which is an arena for meeting (or mediation) between investors, the investor in a trading platform acts with the operator of the arena, in a way that creates a built-in conflict of interest of the arena. This is because the profits of one mean a deduction from the other's pocket, and the arena has a clear interest in the fact that the customer will not profit because the profits are deducted from its own pocket.
It should be noted that this investment activity is usually referred to by the general name "Forex", because the investment activity is in relation to the derivatives of foreign currencies, hence the name "Foreign Exchange"; In this case, it can be said that the term "Forex" refers not only to foreign currencies but also to other underlying assets.
- Activity in a merchant arena can be carried out in all kinds of forms, with human involvement, through online means and various technological developments, or in a combination and mix of both. In the case before us, the "robot" is the star, which is actually a software that includes an algorithm for performing various actions, including choosing investments and managing investments. In the case before us, his activity was mainly trading management, i.e., executing buy and sell orders in various types of financial instruments determined by the user (P. 1.2023, p. 10, para. 28 - the notation P indicates a reference to the minutes; See also P/156). Trading is carried out in the same software, also known as Algorithmic Trading, and is usually referred to as High Trading Frequency (HTF) (Gitit Gur Gershgoren et al., Working Paper: Algorithmic Trading and High Frequency Trading - Overview and Preliminary Findings from the Israeli Capital Market, published on the RNAA website (November 2013)). Algorithmic trading can be characterized as follows:
"Algorithmic trading utilizes preset formulas to buy, sell, and hold positions in various financial instruments. Computers often exclusively execute these complex formulas without any human interference after the initial installation. Computers are programmed to "automatically capture and read market data in realsw-time, transmit thousands of order messages per second to an exchange, and execute, cancel, or replace orders based on new information on prices or demand" (Tom Lin, The New Investor, 60 UCLA Law Review 678 (2013); see also the report of the Committee for the Improvement and Encouragement of Liquidity on the Stock Exchange - Final Report, p. 12 (2014)).
- In this introductory chapter, we will devote a few words to the concept of a "contract for difference" in the context of trading in a trading arena. A CFD is a leveraged "derivative" financial instrument whose value is derived from the price of an underlying asset (forex, gold, etc.) determined by the trader's arena. According to the contract, the seller (the arena) undertakes to pay the buyer (the investor) the difference between the current value of the underlying asset on the day of the transaction, and the value of the asset at the date of the contract realization. Accordingly, the investor gains or loses depending on the direction of the price movement of the underlying asset. When the investor assesses that the value of the underlying asset will increase, he is expected to purchase the contract, but in the event of a decrease in the value of the underlying asset, he may sell short. Moreover, when the client's loss in all the trades he has opened reaches a certain percentage of the total funds in his account, the arena proactively closes his transactions and he will be deleted from trading (as a result of the high leverage of the transactions).
- The trading arena relevant to the indictment before us is Pepperstone, which is a licensed trading arena under Australian law, but there is no dispute that it is not authorized by the Israeli authorities. The defendant does not own rights to Preston in any form and is not connected to the management of the scene. The defendant was a customer of the arena, but at the same time, he worked to make it accessible, broker and direct investors in Israel to trade in Pepperstone, in exchange for favors that Pepperstone gave him, according to marketing models developed by the arena. After a connection was established between the defendant and a potential customer, the defendant would refer the client to open an account in the merchant's arena and assist him in doing so, and then install a robot that operates on the client's account. Sometimes, the client would experiment with a demo account and after a while he would deposit a sum of money in the account and start "real" activity. As the evidence shows, not every arena allows for the installation of a robot that can perform calculation operations. Pepperstone makes it possible.
- Against this background, the case in question bears a number of unique characteristics. Unlike other cases that deal with the responsibility of the founders, managers and owners of trading arenas, the defendant here is not connected to the trading arena, but nevertheless, he derived (not high) benefit from the referral of customers to the arena and from the activity carried out by the clients in their accounts. Another unique feature is related to the operation of the robot within the framework of the account and the defendant's activity in this context. In particular, this relates to the claim that the defendant managed investments, inter alia, using the same algorithm. This will be clarified later.
- Finally, we will make a number of general comments regarding the evidence and the manner in which it is examined.
First, there are factual disputes between the parties, but in light of what is stated in the detailed reply to the indictment, and after the evidence has been placed before me and I have listened to the summaries of the arguments, it appears that the factual dispute is more limited. In general, it can be said that the dispute focuses on the question of the interpretation of the evidence and the picture that emerges from it.