Binary Options Regulations and Risks
By Kristy Naylor, LegitScript Legal Counsel
In previous articles in this series, we covered the complicated world of forex trading and the largely restricted practice of contracts for difference. One of the most popular forms of modern trading, however, is binary options.
What Are Binary Options?
Binary options are a bet on whether an asset (usually a stock) will trade higher or lower than a certain price at a certain point in time, usually very close to when you make the bet. These options have drawn a lot of regulatory attention in recent years in countries such as Brazil and India. Other than the name, they have almost nothing to do with traditional options and, like CFDs, the bettor never actually buys the stock they’re betting on. If the bettor is correct, they make a pre-established percentage of their bet. If they’re wrong, they lose all of the money they’ve bet.
Other names for binary options include all-or-nothing options, bet options, and one-touch options. Although binary options are generally not classified as gambling, the bet (especially if it takes place within a short time frame) has sometimes been compared to betting on red or black at a roulette wheel. Proponents argue that binary options incorporate skills, research, analysis, and strategy — not just blind luck.
Binary options are either banned or strictly regulated in a number of jurisdictions such as the United States, Canada, EU member states and, most recently, Australia.
Risks and Problematic Actors
A study by the Australian Securities and Investments Commission found that about 80% of retail clients lost money trading binary options and that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics: the all-or-nothing payment structure, the short contract duration, and the negative expected returns.
In addition to the risks associated with trading binary options, the U.S. Securities and Exchange Commission has identified common frauds associated with binary options trading platforms, including refusal to credit customers’ accounts, software manipulation to show that customers lost money when they actually won, and widespread identity theft. Prior to the practice being banned in Canada, binary options fraud was so rampant that the Canadian Provincial Securities Administrators created an entire website devoted to binary options scams.
Binary Options Example: Blue Bit Analytics
The U.S. Commodity Futures Trading Commission (CFTC) issued an order requiring New York resident Glenn Olson to pay more than $1 million for his role in a fraudulent binary options scheme. According to the CFTC, Olson admitted that he and others misrepresented the profitability of trading through the company Blue Bit Analytics. They also reportedly manipulated or fabricated trades in customer accounts to the customers’ disadvantage, prevented customers from withdrawing funds, and misappropriated customer funds.
This post is part of the series Financial Trading Platforms: Regulations and Risks. This series offers a high-level overview of common and popular complex financial instruments — including forex trading, contracts for difference, and binary options — to help payments companies consider key points when onboarding these types of merchants. For more information, download the full guide.
Posts included in the series:
Part One: Forex Trading Regulations and Risks
Part Two: Contracts for Difference Regulations and Risks
Part Three: Binary Options Regulations and Risks
Part Four: Financial Trading Platforms Risks and Warning Signs