In terms of revenue generation, binary options are a relative newcomer to the world of investment. They are popular because they are easy to understand, and by investing in binary options with a licensed broker, you are unlikely to lose vast amounts of money. The flip side is that you are also unlikely to make vast amounts of money, but that’s the ‘penalty’ you pay for keeping risk to an acceptable minimum.
Binary options are so-called as for each trade there are only two outcomes – you get nothing back if your trade fails, and you receive back a certain fixed amount if your trade is successful. If you buy stocks and your stocks crash, then you could lose everything you’ve invested. With binary options you are not actually buying stocks – you’re simply wagering on their performance.
The concept of binary options trading has only been around since 2008. Unfortunately, binary options trading has developed something of a poor reputation. This is mainly due to the actions of a minority of brokers who are swindling ill-prepared traders out of significant amounts of money.
Regulation paves the way for the protection of traders
The usual way of preventing unscrupulous parties from deceiving clients is via regulation. If you want to trade in binary options without falling foul of a broker scam, then choose a regulated broker. However, regulation comes with issues itself.
Many observers and lobbyists view binary options trading as gambling. A trader is betting on the value of a commodity, currency or stock rising or falling. There is no guarantee of the result, just as there is no guarantee that the next spin of a roulette wheel will result in red, or black.
Online casinos have been regulated for many years, however, until 2014 in the UK licensing could be acquired via any number of offshore regulatory boards. Curaçao, Gibraltar and Malta all became popular suppliers of gambling licences. This changed on 1 November 2014 when the Gambling (Licensing and Advertising) Act came into force. This act stipulated that online casinos could not offer their services to UK-based customers unless they had a licence issued by the UK Gambling Commission (UKGC).
It’s likely that binary options trading will take the same path. Currently, the regulation of binary options brokers has fallen to the Cyprus Securities and Exchanges Commission (CySEC). Any binary options broker with a CySEC licence is able to trade anywhere in the EU. Some CySEC-regulated brokers offer their services to traders in the US and Canada.
The cloudy issue of the status of UK binary options trading – investing or gambling?
This is perhaps not a satisfactory state of affairs for UK-based binary options traders. Historically, the UK government has left control of binary options trading in the UK to the UKGC. When the government originally decided whether binary options trading qualified as gambling or investing, they said that binary options are “a form of fixed-odds betting on movements in financial markets” and hence should fall under UKGC control. Most observers believe that regulation should be handled by the Financial Conduct Authority (FCA) – the UK’s independent financial regulatory body.
The UK government seems to agree. In May 2015 the then coalition government began a consultation aimed at deciding whether the regulation of UK-based binary options brokers should pass to the FCA from the UKGC. In detail, the decision was to be made as to whether binary options trades qualify as MiFID (Markets in Financial Instruments Directive) financial instruments and should therefore come under FCA regulation. The consultation closed on 18 June 2015. The results of the consultation were supposed to be published in early 2016, but have been delayed.
Different jurisdictions have different attitudes towards the legality and regulation of binary options trading:
In the United States it is only legal for binary options brokers to offer their services to US-based citizens if they are properly registered with the Commodity Future Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). Very few brokers, however, have managed to secure licensing. In 2013 the large Cypriot/Israeli broker Banc De Binary was fined $11 million for accepting US-based customers without the necessary licensing.
In Canada binary options trading can only be performed by Canadian citizens at brokers that have been regulated by the Canadian Securities Administrators (CSA). This is something of a misnomer, as no brokers in Canada have been licensed by the CSA. This practically makes binary options trading illegal in Canada.
Australians are able to trade binary options at any broker with a licence issued by the Australian Securities and Investments Commission (ASIC).
The French financial regulatory body, the Autorité des Marchés Financiers (AMF) banned the advertisement of all binary options services to its citizens in August 2016. Forex products and CFDs with leverage greater than 1:20 were banned as well. As a result of the ban, many leading brokers simply stopped accepting registrations from French-based citizens.
The Belgium financial authorities took matters one step further. Around the same time as the French advertising ban, the Financial Services and Markets Authority (FSMA) decided to ban binary option brokers, Forex trading and CFDs altogether.
The biggest issue facing binary options traders – scams
This seeming hostility towards binary options brokers is not borne out of a dislike of the ‘gambling’ nature of such trading – after all, in France alone the annual spend on online gambling is over €725 million. The issue some jurisdictions have with binary options trading is the massive amount of client scamming that occurs via disreputable sources.
Most scams operate by first luring a client in and then offering them ‘get rich quick’ schemes. Initially, everything will appear to be legitimate – the site will ask for a standard deposit amount of $250. Once the trader has made a few trades (whether successful or not) they will be contacted with the offer of a ‘no risk’ deal for a sizeable investment. Once the sizeable deposit has been made, the traders account is closed.
Regulators are cracking down on scam sites, though. In August 2016 two Israeli sites – Vault Options Ltd and Global Trader 365 were fined $4.5 million and closed down. The lawsuit was brought about by the CFTC. One man had deposited $17,500 with Vault Options and was then send a fraudulent cheque when he tried to have his deposit returned. Global Trader 365 had conned a Michigan woman out of $44,200, telling her she had to pay $14,200 in ‘taxes and fees’ after she had made a $30,000 deposit.
Despite the issue with scamming, legitimate binary option brokers are still experiencing substantial growth. In Q1 2016 the binary options broker EXTrader reported transactions worth $52.8m. This was more than double the amount of transactions recorded in Q1 2015.
By definition trading in binary options is very definitely black and white. Mix those two pigments and you perhaps get a little understanding of how the binary options market currently stands, with its issues over scams, regulations and licensing.