Trading bots have risen in popularity over the past two decades, and technological breakthroughs, particularly relating to artificial intelligence, have supercharged the sector, but are trading bots legal? Find out what you need to know about the legality of using trading bots before you deploy them and learn how to identify scams and fake bots.
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What Are Trading Bots? - An Introduction
When most traders reference trading bots, they refer to algorithmic trading solutions, which handle 80%+ of Forex trading volumes and 70% plus of equity trading. Among the most popular are expert advisors or EAs, native to the MT4 trading platform, the leading algorithmic Forex trading platform, but are trading bots legal?
The short answer is yes, but exceptions apply, and some brokers or markets apply restrictions. There is also a grey area when it comes to AI-assisted trading bots. Trading bots in financial markets are not only legal, but they dominate trading activity, handle the bulk of research, and operate 100% autonomously without human interference.
Retail traders can access thousands of trading bots on various platforms, which generally do no work in the long term for numerous reasons, as evident by decades of data and live trading performances.
Here are the core reasons many retail trading bots do not work:
- Poorly coded trading bots
- Simple strategies that have a track record of long-term losses
- Trading bots with only one strategy
- Inability to adapt to changing market conditions
- Static risk management profiles
Sophisticated algorithmic trading solutions, which financial firms, traders, and developers guard at all costs to maintain their competitive advantage, are generally unavailable for sale to retail traders.
The core features of the best algorithmic trading solutions include the following:
- Numerous trading strategies to deploy based on market conditions
- In-depth analytics consisting of technical and fundamental analysis
- Dynamic risk management profiles that adjust risk parameters
- AI-assisted decision-making and selection of which strategy to deploy
- Flawless coding to ensure error-free trade execution and increase the overall speed of operations for low-latency trading
The Legality of Trading Bots
Since social media and chatbots emerged, the term bot has gained negative connotations, but are trading bots legal?
Using trading bots in financial markets is legal in most countries. In other sectors like online marketplaces for buying and selling various types of goods or gaming, where gamers can trade in-game items, usually outlaw trading bots.
Algorithmic trading accounts for 80%+ of daily trading volumes, confirming the legality of trading software, sometimes known as a trading bot. Most brokers offer at least one trading platform allowing traders to use trading bots, with MT4 as the leading algorithmic platform.
Under Which Conditions Are Trading Bots Considered Illegal?
While trading bots in financial markets are legal and dominate market activity, in certain circumstances they can be illegal.
Here are the more common conditions that make trading bots illegal:
- Market manipulation, including placing fake orders or placing high-volume orders and canceling them immediately to impact Level 2 price feeds
- Using strategies that a broker does not allow (for example, arbitrage trading or hedging), which brokers mention in their terms and conditions
- Using strategies a financial exchange does not allow
Types of Trading Bots and Their Relative Legalities
Today’s financial markets depend on algorithmic trading solutions, often simplified as trading bots, which is a misleading term. The Forex market is the most algorithmic-dependent financial market, and the emergence of AI in Forex trading has magnified the sophistication of algorithmic trading systems.
Are AI Trading Bots Legal?
AI trading bots are legal, but their level of sophistication may spark legal debates as soon as this decade. One dominant question that legal professionals must resolve is the liability if an AI trading bot that can create strategies or modify existing ones violates market rules or engages in illegal behavior. The owner or developer did not program the AI to violate the rules, but the AI wrote an algorithm to exploit market inefficiencies. No legal precedent exists, making this a compelling sector to monitor.
Are Crypto Trading Bots Legal?
The legality of crypto trading bots depends more on the legal status of cryptocurrency trading, which varies between countries.
A trader using a crypto trading bot in a country where cryptocurrency trading is illegal would violate the rules twice. Firstly, for trading cryptocurrencies and second by using a cryptocurrency trading bot.
The Role of Brokers in the Legality of Trading Bots
With few exceptions, most trading activities require a broker. Therefore, traders must ensure their broker supports algorithmic trading and maintains the necessary infrastructure.
Here is what algorithmic traders should look for:
- A broker allowing algorithmic trading without restrictions on strategies, as some brokers implement internal policies banning select strategies
- Ultra-fast order execution via an STP/ECN/NDD trading environment
- Competitive, commission-based trading fees with volume-based rebates
- Deep liquidity, which increases order execution and lowers trading fees
- No requotes and positive slippage pass-through
Most brokers allow algorithmic trading using trading bots, as they benefit from the increased trading volume and commissions. Many brokers passively discourage trading bots with inadequate trading infrastructure and high fees.
Scams and Fake Bots
The popularity of trading bots and algorithmic trading also creates excellent conditions for forex scammers. The only possibility for a trading bot to deliver consistent returns is if traders code their strategy. Trading bots for sale do not work, as has been evident over the past two decades.
Here are tips on how to spot scammers:
- Excessive returns, often illustrated via linear portfolio growth in doctored account history screenshots
- Promise of guaranteed profits
- Curve-fitting, referring to a strategy optimized using an exclusive set of historic data and not identifying trends and correlations that can accurately predict future price action
- Lack of transparency about the team behind the trading robot
- Low-cost trading robots
Bottom Line – Are Trading Bots Legal?
Are trading bots legal? Trading bots in financial markets are legal and account for 80%+ daily trading activities. Select circumstances can make their usage illegal, and AI has elevated the abilities of algorithmic trading to a new level. Despite their legality, the trading bots that retail traders can purchase frequently fail to deliver promised returns and only generate consistent income for the companies or individuals selling licenses.
Therefore, there is no substitute for learning how to trade and coding chosen strategies for algorithmic trading.
