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Binary option

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A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all.[1][2] The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the American Stock Exchange).[3]

While binary options theoretically play a role in asset pricing, they are prone to fraud and banned by regulators in many jurisdictios as a form of gambling.[4] Many binary option outlets have been exposed as fraudulent.[5] The U.S. FBI is investigating binary option scams throughout the world.[6][7] They estimate that the scammers steal US$10 billion annually worldwide.[8] The use of the names of famous and respectable people such as Richard Branson to encourage people to buy fake "investments" is frequent and increasing.[9] Articles published in the Times of Israel newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".[10][11]

External video
Simona Weinglass on prosecuting binary options firms, Times of Israel, 3:06[12]

How binary options work

Binary options "are based on a simple 'yes' or 'no' proposition: Will an underlying asset be above a certain price at a certain time?"[13] Trades place wagers as to whether that will or will not happen. If a customer believes the price of a commodity or currency will be above a certain price at a set time, he buys the binary option. If he believes it will be below that price, he sells the option. The price of a binary is always under $100.[13]

Investopedia described the binary options trading process in the U.S. thusly:

[A] binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then you will pay $44.50, if you decide to sell right then you'll sell at $42.50.

Let's assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100 - $44.50 = $55.50 (less fees). This is called being "in the money."

But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called "out of the money."

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss (compared to letting it expire out of the money).[13]

Every option settles at $100 or $0, $100 if the bet is correct, 0 if it is not.[13]

On non-regulated platforms, client money is not necessarily kept in a trust account, as required by government financial regulation, and transactions are not monitored by third parties in order to ensure fair play.[14]

Binary options are often considered a form of gambling rather than investment because of their negative cumulative payout (the brokers have an edge over the investor) and because they require little or no knowledge of the markets. Gordon Pape, writing in Forbes.com in 2010, called binary options websites "gambling sites, pure and simple," and said "this sort of thing can quickly become addictive... no one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame."[15]

Pape observed that binary options are poor from a gambling standpoint as well because of the excessive "house edge." One online binary options site paid $71 for each successful $100 trade. "If you lose, you get back $15. Let's say you make 1,000 "trades" and win 545 of them. Your profit is $38,695. But your 455 losses will cost you $38,675. In other words, you must win 54.5% of the time just to break even." [15]

The U.S. Commodity Futures Trading Commission warns that "some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect given the payout structure."[16]

Regulation, and fraud

Many binary option "brokers" have been exposed as questionable operations. In those cases, there is no real brokerage; the customer is betting against the broker, who is acting as a bucket shop. Manipulation of price data to cause customers to lose is common. Withdrawals are regularly stalled or refused by such operations; if a client has good reason to expect a payment, the operator will simply stop taking their phone calls.[10] Though binary options sometimes trade on regulated exchanges, they are generally unregulated, trading on the internet, and prone to fraud.[3] The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have issued a joint warning to American investors regarding unregulated binary options,[17] and have forced a major operator, Banc de Binary, to cease operations in the US and pay back all customer losses.

In Israel, where a high concentration of such firms can be found, binary options trading was prohibited for Israeli customers in March 2016, on the grounds that it is a form of gambling and not a legitimate investment technique. On June 18, 2017, a ban on marketing binary options to customers outside of Israel was passed by the cabinet and is expected to be fast-tracked through the Knesset.[18][4]

Australia

The Australian Securities & Investments Commission (ASIC) warned Australian investors on Friday 13 February 2015 against Opteck, an unlicensed binary option provider.[19] The ASIC later began a focused effort to control unlicensed derivative providers, including "review" websites, broker affiliates and managed service providers related to binary option products.[20]

Belgium

In August 2016, Belgium's Financial Services and Markets Authority banned binary options schemes, based on concerns about widespread fraudulent activity.[21]

Canada

No firms are registered in Canada to offer or sell binary options, so no binary options trading is currently allowed. Provincial regulators have proposed a complete ban on all binary options trading include a ban on online advertising for binary options trading sites.[22]

Cyprus

On May 3, 2012, the Cyprus Securities and Exchange Commission (CySEC) announced a policy change regarding the classification of binary options as financial instruments. The effect is that binary options platforms operating in Cyprus, where many of the platforms are now based, would have to be CySEC regulated within six months of the date of the announcement. CySEC was the first EU MiFID-member regulator to treat binary options as financial instruments.[23]

In 2013, CySEC prevailed over the disreputable binary options brokers and communicated intensively with traders in order to prevent the risks of using unregulated financial services. On September 19, 2013, CySEC sent out a press release warning investors against binary options broker TraderXP; CySEC stated that TraderXP was not and had never been licensed by CySEC.[24] On October 18, 2013, CySEC released an investor warning about binary options broker NRGbinary and its parent company NRG Capital (CY) Ltd., stating that NRGbinary was not and had never been licensed by CySEC.[25]

The Cypriot regulator also temporarily suspended the license of the Cedar Finance on December 19, 2013. The decision was taken by CySEC because the potential violations referenced appeared to seriously endanger the interests of the company’s customers and the proper functioning of capital markets, as described in the official issued press release. CySEC also issued a warning against binary option broker PlanetOption at the end of the year and another warning against binary option broker LBinary on January 10, 2014, pointing out that it was not regulated by the Commission and the Commission had not received any notification by any of its counterparts in other European countries to the effect of this firm being a regulated provider.

The Cyprus regulator imposed a penalty of €15,000 against ZoomTrader. OptionBravo and ChargeXP were also financially penalized. CySEC also indicated that it had voted to reject the ShortOption license application.[26]

In 2015, CySEC repeatedly fined Banc De Binary for several violations including the solicitation of US clients.[27][28] In 2016, the regulator fined Banc De Binary Ltd once again for violation of its legislation. The broker has come to a settlement of €350,000.[29]

France

In August 2016 the Sapin II bill on transparency was announced by the Autorité des Marchés Financiers (AMF), seeking to outlaw all financial derivatives advertising. The AMF stated that it would ban the advertising of certain highly speculative and risky financial contracts to private individuals by electronic means.[30][31] The document applies specifically to binary options, and to contracts for difference (CFDs), and financial contracts on currencies. The French regulator is determined to co-operate with the legal authorities to have illegal websites blocked.[32] The law also prohibits all forms of sponsorship and partnership that results in direct or indirect advertising of the financial products it covers. This ban was seen by industry watchers as having an impact on sponsored sports such as European football clubs.[33]

The company 24Option, based in Cyprus, was banned from trading in France by AMF earlier in 2016.[34] They had sponsored a well-known Irish mixed martial artist, Conor McGregor, who in turn promoted the company through social media.[35]

Israel

Binary options trading

In March 2016 binary options trading within Israel was banned by the Israel Securities Authority, on the grounds that such trading is essentially gambling and not a form of investment management. The ban may soon extend to overseas clients as well. The chairman of the Securities Authority asked Israel's Attorney General to amend the law so as to allow such a ban. On June 18, 2017, the extended ban was passed by the cabinet and is expected to be fast-tracked through the Knesset. If passed the new law would also ban Israelis from trading with overseas customers in any financial instrument, unless the Israeli broker has a license to trade that instrument in the customer's home country[18]

Binary options comprises 63%, or $1.25 billion, of Israel's $2 billion securities and derivatives industry, which contributed 0.7% of the country's gross domestic product during 2016.[4]

Responding to The Times of Israel’s reporting, the Israeli Prime Minister’s Office in October 2016 condemned the industry’s "unscrupulous practices" and called for the entire industry to be outlawed worldwide.[36]

Fraud

In 2016 The Times of Israel ran several articles on binary options fraud. "The wolves of Tel Aviv: Israel's vast, amoral binary options scam exposed" exposed the industry as a scam.[10] A second article describes in detail how a binary options salesman fleeced clients. "According to one ex-employee of a firm that employs over 1,000 people in a high-rise office building in Tel Aviv, losses are guaranteed because the 'dealing room' at the binary options firm controls the trading platform — like the crooked ownership of a rigged casino manipulating the roulette wheel." [11]

In July 2016 the Israeli binary option firms Vault Options, Ltd. and Global Trader 365 were ordered by the U.S. District Court of Northern Illinois to pay more than $4.5 million for unlawful off-exchange binary options trading, fraud, and registration violations. The companies were also banned permanently from operating in the US or selling to US residents.[37]

In November 2016 the Israel Securities Authority carried out a raid on the Ramat Gan offices of binary option broker iTrader. The CEO and six other employees were charged with fraud, providing unlicensed investment advice, and obstruction of justice.[38]

On May 15, 2017, Eliran Saada, the owner of Express Target Marketing, which has operated the binary options companies InsideOption and SecuredOptions, was arrested in Tel Aviv on suspicion of fraud, false accounting, forgery, extortion and blackmail. The case involves a Singapore woman who claims to have lost over $500,000 to the firm.[39][40]

Malta

In March 2013 the Malta Financial Services Authority (MFSA) announced that binary options regulation would be transferred away from Malta's Lottery and Gaming Authority.[41] On 18 June 2013 MFSA confirmed that in their view binary options fell under the scope of the Markets in Financial Instruments Directive (MiFID) 2004/39/EC. With this announcement Malta became the second EU jurisdiction to regulate binary options as a financial instrument. This required providers to obtain a category 3 Investment Services license and conform to MiFID's minimum capital requirements;[42] firms could previously operate from the jurisdiction with a valid Lottery and Gaming Authority license.

New Zealand

In April 2017, New Zealand's Financial Markets Authority (FMA) announced that all brokers that offer short term investment instruments which settle within 3 days are required to obtain a license from the agency.[43] This is intended to incorporate binary options as well as CFDs (Contracts for Difference).

United Kingdom

Binary options trading

As of May 2017 binary options were not regulated by the Financial Conduct Authority (FCA), so investments in them are not protected by the financial services complaints and compensation scheme.

Fraud

Fraud was rife, often using the names of famous and respectable people without their knowledge. According to national fraud and cybercrime reporting centre Action Fraud, 664 binary options frauds were reported in 2015/16, increasing to 1,474 in 2016/17. The City of London police in May 2017 said that reported losses for the previous financial year were £13m, increased from £2m the year before.[9]

United States

Binary options trading

In the U.S., the Securities and Exchange Commission approved exchange-traded binary options in 2008.[44] Trading commenced on the American Stock Exchange and the Chicago Board Options Exchange (CBOE) in May and June, 2008.

Amex offers binary options on some exchange traded funds and a few highly liquid equities such as Citigroup and Google. Amex calls binary options "Fixed Return Options" (FROs); calls are named "Finish High" and puts are named "Finish Low". To reduce the threat of market manipulation of single stocks, Amex FROs use a "settlement index" defined as a volume-weighted average of trades on the expiration day. Amex and Donato A. Montanaro submitted a patent application for exchange-listed binary options using a volume-weighted settlement index in 2005.[45]

CBOE offers binary options on the S&P 500 (SPX) and the CBOE Volatility Index (VIX).[46] The tickers for these are BSZ[47] and BVZ, respectively.[48]

In 2009 Nadex, a U.S.-based binary options provider, launched binary options on a range of forex, commodities and stock indices' markets.[49]

Fraud

On June 6, 2013, the U.S. Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission jointly issued an Investor Alert to warn about fraudulent promotional schemes involving binary options and binary options trading platforms. The two agencies said that they had received numerous complaints of fraud about binary options trading sites, "including refusal to credit customer accounts or reimburse funds to customers; identity theft; and manipulation of software to generate losing trades." Other binary options operations were violating requirements to register with regulators.[16]

In 2013, U.S. regulators charged Israeli-Cypriot Banc De Binary Ltd., with illegally selling binary options to U.S. investors.[16][50] Three years later, the company reached an $11 million settlement with U.S. authorities. Regulators found the company used a "virtual office" in New York's Trump Tower in pursuit of its scheme, evading a ban on off-exchange binary option contracts.The company neither admitted nor denied the allegations.[51]

In February 2017 the Times of Israel reported that the U.S. Federal Bureau of Investigation (FBI) was conducting an active international investigation of binary option fraud. It quoted an FBI supervisory special agent as saying, “"Our agents are going to look under every rock and stone....We are not limited to the USA." Victims from anywhere in the world were asked to contact an FBI field office or the FBI's Internet Crime Complaint Center. The investigation is not limited to the binary options brokers, but is comprehensive and might include, for example, the industry's backend, providers of services that allow the industry to operate. Credit card issuers will be informed of the fraudulent nature of much of the industry, which could possibly allow victims to receive a chargeback, or refund, of fraudulently obtained money.[6]

On March 13, 2017 the FBI reiterated their warning, declaring that "The perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money." They also provide a checklist on how to avoid being victimized.[52][7]

See also

References

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  2. ^ Gatheral, J. (2006). The volatility surface: a practitioner's guide (Vol. 357). John Wiley & Sons.
  3. ^ a b Binary Option Definition Investopedia. Retrieved 2013-06-30.
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  22. ^ Shecter, Barbara (April 26, 2017). "Canadian watchdogs move to ban binary options as fraudulent schemes fleece investors, steal identities". Financial Post. Retrieved April 26, 2017. 
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  29. ^ Finance Magnates: Breaking: Banc De Binary Settles With CySEC to Pay €350,000
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  31. ^ Andrew Saks-McLeod (9 January 2017). "IG Group officially responds to French FX and CFD advertising ban". Financefeeds.com. Retrieved 18 May 2017. 
  32. ^ Maria Nikolova (10 January 2017). "Breaking: AMF toughens its stance on advertising following public consultation". Financefeeds.com. Retrieved 18 May 2017. 
  33. ^ Maria Nikolova, "French football clubs rush to terminate binary options partnerships", Finance Feeds, Under Article 77 of the Sapin II law, football teams have until the end of June this year to terminate all sponsorships 
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  35. ^ Barry O'Halloran (November 19, 2016), "Conor McGregor sponsor barred from operating in France", Irish Times 
  36. ^ Simona Weinglass, Fleeced by Israeli binary options firm, Canadian man dies by suicide (19 January 2017), The Times of Israel
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  40. ^ Cohen, Tova (May 16, 2017). "Israeli police arrest owner of binary options firm accused of fraud". Reuters. Retrieved May 16, 2017. 
  41. ^ Gaming or Trading? That is the Question – MFSA To Regulate Binary Options as a Financial Product
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  49. ^ Nadex 2009 Press Release. Retrieved September 20th, 2011. (PDF) . Retrieved on 2013-01-12.
  50. ^ "SEC Warns Investors About Binary Options and Charges Cyprus-Based Company with Selling Them Illegally in U.S.". Retrieved 23 May 2014. 
  51. ^ WSJ: Banc de Binary Reaches $11 Million Settlement with U.S. Authorities
  52. ^ "Binary Options Fraud, A Word of Warning to the Investing Public". FBI.gov. Federal Bureau of Investigation. March 13, 2017. Retrieved March 14, 2017. 

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