EAs and the trading robot dichotomy: Chinese trust vs Western skepticism: FinanceFeeds investigates

The distinct difference between the prominent centers of Western retail FX trading and those in the Asia Pacific region (with the exception of Japan) is the geographical and cultural dichotomy between the Western world’s self-directed retail traders and the Far East’s reliance on automated trading robots, otherwise known as Expert Advisers (EAs).

Indeed, one of the reasons for the absolute widespread ubiquity of the MetaTrader platform as a third party solution is not simply its low entry cost, but its compatibility with EAs which in turn facilitates the ease of onboarding vast introducing brokers (IBs) in Asia who often trade their clients accounts automatically via their own in-house developed EAs.

Theoretically, it is possible to bring on board an IB which trades 90,000 lots per month in a second tier Chinese development town by simply paying a monthly maintenance fee to MetaQuotes and a one-off white label licence purchase of $5000.

Of course, building a brokerage business on this premise means that the entire intellectual property inventory will be on MetaQuotes servers rather than the broker, which in FinanceFeeds opinion is why no MetaTrader-based brokerage has ever been able to list its stock publicly however it is, if executed correctly and effectively, a very good means of generating huge levels of income from IBs that trade multiple accounts via MAM systems connected to an EA whilst keeping operating costs down.

Indeed, the remarkable dynamic here is that Chinese investors, some of which are real estate magnates with huge developments including apartment towers, shopping malls, hotels and commercial premises, the monthly rental income from which is then used to trade FX and placed with IBs to do this on their behalf.

Such investors are astute and have a detailed understanding of risk and reward, many of them seeing the real estate as long term capital asset value, whilst maximizing monthly income by trading it, which is exactly what banks do.

The very matter that such investors trust EAs developed for MetaTrader by their IBs speaks volumes – quite simply these work well. If they did not, they would be pilloried by the Chinese government and all operators would be shut down, with astute investors never approaching them again.

Quite the contrary is the case, however and they are prolific. One particular meeting attended by FinanceFeeds last year involved a medium sized Australian retail FX broker presenting to a Chinese IB who manages accounts via EAs. The broker’s sales executive asked the CEO of the introducing brokerage how much he would like to deposit in order to test the brokerage execution with an EA connected to it.

Very nonchalantly, he said “About 250” which was taken as a $250 deposit to perform some tests, which may well be normal among Western partners. The next day, a deposit of $250 million was made, purely to perform tests.

Bearing in mind that the Chinese firms have absolutely no means of gaining inside information into any companies abroad and if something goes wrong there is no recourse, this is a leap of faith, and one that is done in a suited, composed fashion to say the least.

Here in the West, however, things are somewhat different.

Self-direction is the common form, especially in Britain, Australia and North America, where giants with their roots having been planted thirty years ago in New York and London provide proprietary platforms to their traders who expect full and complex functionality.

Western traders who are long-term customers of large FX and CFD firms are analytical and careful, learning their skills in a progressive and conservative manner without relying on portfolio managers or EA use.

Indeed, the strange consideration here is that where EAs are regarded as a benchmark trading method in China, and are trusted, in the West, they are met with skepticism.

MetaQuotes may well dominate EA driven markets, however in regions where most self-directed traders make up the retail customer base, there is no MetaTrader at all.

In Japan, where the home-grown giants which trade over $1 trillion in notional volume per month just on their retail book, MetaTrader is virtually non-existent.

FinanceFeeds reported in September last year that Forex.com Japan, the retail FX brand of GAIN Capital Japan Co., Ltd had sought to distance itself from sellers of EAs and related products for MetaTrader 4. In an announcement to traders, the FX broker noted that it is not responsible for any losses suffered due to the deployment of such products by its clients and that it will not respond to any complaints with relation to these products.

Although in its essence the message sent by this announcement is trivial – “we are not responsible for what results from the use of third-party software”, it also highlights some continuing problems for the online trading industry, the first of them being misleading marketing slogans. Forex.com Japan notes that often EA sellers fail to warn about the risk of losses associated with the use of the advertised products.

By mid 2017, ArenaFX, YJFX and MONEX have abandoned MetaTrader 4, leaving overseas entities OANDA and Forex.com to soldier on with it, however they do not make up the lion’s share of the Japanese retail market. Traders using GMO Click, DMM Securities and Invast are using proprietary platforms for the most part.

In Britain, MetaTrader does not exist at all, largely due to the CFD and spread betting nature of the British market, however no EAs are used at all, so there is no market for overseas firms using MetaTrader 4 for British clients.

Over the weekend, a British trader explained “When I first learned of EAs I knew right away that if you must use them, it is better to make your own for 2 reasons. 1) you need to understand what this thing is doing with your money. 2) if you are unable to generate the rules for your EAs you won’t be successful. That doesn’t mean you won’t be successful manually trading.”

Another skepticism which is very well founded and represents the conservative nature of British traders is “The best way tho think of this is that if an EA can really be regarded as a machine that prints you money. If you had an EA that made you let’s say £300 a day, would you sell it for £50 to random people on the internet or keep it all to yourself?” This is a view point widely held about trainers and vendors that hawk software for retail traders. Surely those with a successful trading background would not need to teach novices?

When asked, another British retail trader stated that he would never use an EA to trade his own account, but would sell them to others and generate income that way. “I would sell it to people where these are commonly used” he explained. “It can only make X% of your total wealth per day. Your ability to earn is limited by how much money you have. So, yes, definitely I’d sell it to people for $50 a day.”

This shows the difference between the mindset in the Western traditional markets and the blind faith in EAs and their developers shown in Asia.

More commentary emphasized this point “I disagree” said one trader. “The vast majority are a cash grab. But with significant research and verifying results yourself or with trusted 3rd parties you can find some really good EAs. I got burned numerous times at first but eventually began to see the signs of what could be trustworthy and what isn’t. Very difficult to trust things on the internet, and even more so with investing!”

Taking the conservative view, a trader in Australia explained “One has to learn to code to take the best advantage of automated trading. As a consolation, some EA’s you can use as trade signals (as good as manual trading). Still, your modifications to that bot are limited to extern values if you either don’t have the source code or don’t know how to code. If forex is too much, there’s always an index or mutual fund for one’s capital gain needs.”

This demonstrates that EAs are viewed as potentially dangerous but are also looked at on an indivudual terminal basis by Western traders in many cases, in that EAs are sold on a B2C basis to indivudual customers with the view of automating their own trading.

In Asia, there is no B2C market at all, and EAs are used on a B2B basis by large IBs and portfolio managers. Individuals are not traders, but investors. They hand their funds over to the IB who then trades it, hence the B2C relationship is between IB and investor, and the B2B relationship is between IB and broker, and IB and EA developer, however most IBs develop their own EA in house and then ask their clients which type of strategy or risk status they want.

“You could actually code an EA that’s robust in more than one instrument, most likely correlated instruments, and one that can adapt to market conditions (e.g., trading criteria that includes ATRs such that the bot will not fire a trade when instrument is ranging). There is potential in ea’s but you have to learn it. As for market makers, that’s different story” was a conclusion from a trader, summing up the view toward EAs.

Whilst the West goes increasingly toward new platforms and self-direction, looking at how mostly all of the providers of social trading have disappeared, and those remaining have reduced to a shadow of their former selves, with the exception of eToro which operates in a completely different manner to its peers is a good sign of the times.

As firms continue to offer social trading and copy trading services, albeit on a much lesser scale than just a few years ago, the FCA has allowed trading volume to be generated via the automatic execution of trades to continue thus far, however as the January implementation of MiFID II approaches, the need to register as an investment manager with the relevant competent authority will be enforced.

This means that all companies offering such a service will have to ensure that every lead trader passes portfolio management examinations and registers as an investment adviser.

A question that has very rarely been asked, and is often overlooked centers on how likely amateur traders that gain commission from retail brokerages and social trading providers by becoming ‘lead traders’ are to be able to pass such exams and be in a position to act as an investment manager, and report their activities in such a capacity.

Bearing in mind that the vast majority of such individuals are based in developing market jurisdictions, are not professional traders or wealth managers, and are using social trading platforms in order to gain commission for generating extra deposit revenue for B-book brokers which then use a profit/loss model and split the inevitable losses between introducer, lead trader and brokerage, the exact conflict of interest that the regulators are attempting to remove from the retail market.

After MiFID II’s implementation, Article 19(1) has been invoked, which establishes that the overriding obligation for investment firms when providing investment services is to act “honestly, fairly and professionally in accordance with the best interests of its clients”.

Therefore, the European Securities and Markets Authority considers that when a firm offers the possibility to deal in financial instruments which have other products (commodities, financial indices, currencies, etc) as underlying, then, depending on the exact circumstances, it is likely to be artificial, and contrary to the overarching obligation of the firm to act honestly, fairly, and professionally, to make a distinction between advice regarding the underlying products of a financial instrument and that financial instrument.

In this situation, the underlying product of a financial instrument and that financial instrument should be regarded as a whole and any personal recommendation, for example, about the underlying product should be regarded as investment advice within the meaning of MiFID.

This ruling puts the vast majority of small, amateur traders who are operating as trade leaders on social and copy trading platforms completely in breach.

Where continental regulatory rulings lead, aligned jurisdictions such as the FCA will follow, the FCA already having stated its intention to operate alongside the MiFID II rulings, and bearing in mind the complexity and conflict demonstrated here, it is very unlikely that a lead trader in a developing market who has been encouraged by a b-book brokerage to bring his network of friends and acquaintances on board and receive a commission for trading their accounts, would be able to be aligned enough with the fund management sector to be able to pass exams and become an accredited portfolio manager.

Realistically, this mindset has been borne out of the same skepticism reserved for EAs.