II IntermediateWeek 13 • Lesson 41Duration: 40 min

RGR Regulatory Requirements for Algo Trading

The rules you can't break — legal compliance for algorithmic traders

Learning Objectives

•Understand regulatory requirements specific to algorithmic trading
•Know the difference between retail and institutional regulatory burdens
•Learn how to stay compliant while building effective trading systems

Explain Like I'm 5

Some rules are prop firm rules — get breached, lose your account. Some are actual laws — get caught, face legal consequences. Know the difference. For retail algo traders, the regulatory burden is lighter than institutional, but it exists. Don't be the person who finds out the hard way.

Think of It This Way

Regulatory compliance is like traffic laws for pilots. Ground vehicles have some rules. Aircraft have far more rules. Algorithmic trading is somewhere in between — more regulated than manual trading, less regulated than institutional quant funds.

1What Applies to Retail Algo Traders

For someone running a prop firm funded account: Definitely applies: - Prop firm terms of service (FTMO rules, etc.) - Broker terms of service (execution rules) - Tax reporting requirements (trading income is taxable) - Money laundering regulations (KYC/AML) May apply depending on jurisdiction: - Market manipulation prohibitions (don't spoof or layer) - Insider trading laws (applies to everyone) - Data licensing restrictions (market data redistribution) Typically does not apply (institutional only): - SEC/FCA registration as investment advisor - MiFID II algorithmic trading authorization - Regulatory capital requirements - Real-time trade reporting obligations The universal rule: don't manipulate markets. No spoofing (placing orders you intend to cancel). No layering. No wash trading. These are criminal offenses regardless of account size.

2Prop Firm Specific Rules

Beyond financial limits, prop firms often prohibit: - News trading around specific high-impact events (some firms) - Holding through weekends (varies by firm) - Copy trading (your trades must be original) - Arbitrage strategies (exploiting broker inefficiencies) - Martingale/grid strategies (some firms ban these explicitly) A well-designed trading engine handles this naturally: - Every trade has a defined stop loss (no grid behavior) - Position sizing is conservative (no martingale) - Strategy is original (built from scratch) - No exploitation of broker infrastructure Always read your prop firm's terms carefully. Rules vary between firms and can change without much notice. What was allowed last month might not be allowed this month.

3Tax Implications

This is the boring-but-important part. Trading income is taxable and the rules differ by jurisdiction: USA: - Short-term capital gains taxed as ordinary income (up to 37%) - Wash sale rule: can't claim a loss if you rebuy within 30 days - Section 1256 contracts (futures) get 60/40 treatment - Mark-to-market election (Section 475) lets active traders deduct losses without limits UK: - Spread betting is tax-free (CFD spread betting, not equity) - CFD trading is subject to capital gains tax - Annual CGT allowance can offset some gains General tips: - Keep detailed records of every trade - Your trading logs = your tax records - Consider structuring through an LLC or similar entity - Get a tax advisor who understands trading That last point is the most important. Tax law is complicated, and the wrong structure can cost you thousands. This is not a place to wing it.

4Building Compliance Into Your System

The best compliance is automated compliance. Don't rely on remembering the rules — code them in. Pre-trade checks (automated): - Position size within limits? - Daily loss within daily limit? - Total loss within total limit? - Stop loss set for every order? - No restricted-event trading? - Within trading hours? Post-trade logging (automated): - Trade timestamp, symbol, direction, size - Entry price, SL, TP - P&L in R and in currency - Account balance after trade Daily reporting (automated): - Daily P&L summary - Current drawdown status - Number of trades - Compliance check pass/fail The key insight: if compliance is a manual process, it will be skipped under stress. Automate everything. No overrides. No "just this once." When the system says no, the answer is no.

Hands-On Code

Automated Compliance Check

python

from datetime import datetime

def compliance_check(symbol, size, balance, config):
    """Pre-trade compliance verification."""
    checks = {
        'position_limit': size <= config['max_position_size'],
        'daily_loss_ok': config['daily_loss'] < config['daily_limit'],
        'total_loss_ok': config['total_loss'] < config['total_limit'],
        'has_stop_loss': True,  # enforced by engine architecture
        'not_restricted': not is_high_impact_news(datetime.now()),
        'trading_hours': is_trading_hours(symbol),
    }
    
    all_pass = all(checks.values())
    
    if not all_pass:
        failures = [k for k, v in checks.items() if not v]
        print(f"COMPLIANCE BLOCKED: {', '.join(failures)}")
    
    return all_pass

# Every trade goes through compliance first.
# No exceptions. No overrides. No manual bypass.

Automated compliance checks prevent rule violations. Hardcode these into your trading pipeline — never allow manual overrides in production.

Knowledge Check

Q1.Which of these is illegal regardless of whether you're retail or institutional?

Assignment

Review your prop firm's terms of service. Create a compliance checklist specific to their rules. Implement automated compliance checks that prevent rule violations.

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