Trading bots are legal, nothing is stopping you from creating and using bots to automatically carry out trades for you. The only thing that could stop you is if the broker or exchange does not offer any “API keys” (Application Programming Interface), which is required for the bot to carry out trades on your behalf. Long story short, the “SEC”’s (the United States Securities and Exchange Commission) stance on “auto-trading” is that you should be careful when subscribing to such a service. Nothing about it being illegal.
On September 29th, 2021 “ESMA” (European Securities and Markets Authority) published a report regarding automated trading bots. The report is very long and thorough about investment companies’ usage of them and possible regulation of them but does not mention anything about the possibility of a ban. They are aware that they exist and that people are using them.
What are trading bots?
Trading bots are computer software, usually something you access through a website dashboard or download a piece of software that can automatically carry out trades for you. The way the bot carries out these trades is usually through API keys, these keys allow your software to interact with the brokerage or exchange to do actions on your behalf. This is how the bots work for both brokerages and crypto exchanges.
How does the bot know when to trade?
The bots are essentially just a collection of rules set by the user or the creators of the bot. There is no emotion involved, all actions are based on rules which all have to be met for the bot to make a trade. Imagine you create a big checklist for the bot of what you consider a good time for you to enter and exit a trade. The bot will scan the pairs for the conditions you told it to look out for and it will cross-reference all of your rules to the conditions of the market, if 100% of all rules match the conditions of the market the bot will enter a trade and now search for conditions that you laid out for it that tell it when to exit. This is the super-simplified version of how the bots work, of course, there are other variations of bots but they all essentially work the same under the hood, look for set conditions, buy, then look for set conditions, and finally sell.
Is my money safe?
This needs to be answered on a case-by-case basis. We will use our bot (BravoBot) as an example, our bot only trades on the “Binance” (cryptocurrency exchange). The API keys that you generate for our bot to be able to automatically trade for you have an option to toggle in between allowing and disallowing withdrawing of currency, which we will make sure you leave off. This means if the option is turned off our bot will never be able to withdraw money from your account, essentially you are protected by the exchange which prevents us from having the ability to withdraw your money. To change this setting on Binance you will have to give two authenticator keys to the website, one from your phone two-factor authenticator, and the second from the email.
Other brokers and exchanges will have their methods to prevent theft like mentioned above and more, some automated bots are less safe than others. Some bots you should consider avoiding are those that require you to deposit your money onto their platform, essentially you have to trust them with your money, and in case of a breach into their system your funds are drastically less safe because they’re all located in their accounts.
Long story short, we advise you to look into the trading bots on a case-by-case basis and how they ensure that your funds are safe. Also, ensure they do not ask for you to deposit all of your funds into their accounts for you to start making money, this is very risky.