News

19 October 2018

Central Bank recognises automated tracking as financial consulting, works out how to combat front running

SOCHI, 18 October. /INTERFAX/ — The Russian Federation's Central Bank has decided to define the automated tracking strategy as broker consultation, First Deputy Head of the Central Bank Sergei Shvetsov said at the FINOPOLIS 2018 Forum.

"We worked with market participants to look at how to define automated tracking: as trusted management or as financial consulting. It has elements of both. But in the end we settled on financial consulting," said Sergei Shvetsov.

He noted that the essence of financial consulting is based in the individual identity of the person being consulted, while collective investment is rooted in the assumption that the individual joining this collective investment thinks about their interests themselves. A financial consultant must evaluate the client's risk profile and suggest products that correspond to this profile, while also managing the client's expectations about what they have bought. If a broker suggests a product that is not in line with the individual's risk profile, then the losses on this product can be reimbursed by the broker who suggested the automated tracking strategy. He said that the regulator does not approve of front running in automated tracking, and therefore the Central Bank has worked with professional market participants and established that the strategy leader that others follow must establish average prices for securities purchases.

"Like a train engine and the carriages that follow it, you cannot have a situation in which the leader acts first and the rest repeat those actions some time later, because if there is a long chain, if there are lots of carriages, then it has a clearly negative impact on the market environment. The leader must know about the length of their chain, and take investment decisions cognizant of the fact that they are making one large investment, not that they have any advantage over those that follow on behind them," says Shvetsov.

He said that the Central Bank considers automated tracking a useful strategy providing it is transparent. However, the Central Bank is combating virtual auto-tracking, when no investment deals are concluded, no securities are acquired, and the client is shown a position that has nothing to back it up.

"I think that the market has still not fully bottomed out, but technology makes it possible to identify the key to this solution, which could make it more interesting to serve 10 million passive clients than to serve 2,000 active clients, who trade like crazy every day. Millions of Russian citizens have no need to carry out daily operations, spending an hour or two of their time analyzing the market each day. Even if robots are able to take over this analysis, people do not need to toss and turn at night, wake up, look at the screen and worry about what has happened to their shares. I think that passive investment with straightforward instruments, small accounts, and robot-driven consulting, provided it is not focused on identifying inefficiencies but rather on creating sustainable, if not highly profitable, portfolios, and provided it involves minimum outgoings on the consulting aspect, then this is what has greater potential to attract Russians to the market, than success stories about 300% annually," Shvetsov said.