Binary options are one of the recent methods of trading in which investors bet on the price movement of an underlying asset and speculate whether it will rise in value or fall. In binary options, traders do not actually own any asset since they do not buy or sell these assets. They just bet on the price fluctuations of the underlying assets and if the speculation is correct, they can win up to 80% returns on investment but if the speculation goes wrong then they will lose the amount invested on that particular trade.
Since binary options are relatively new to the financial market, a lot of scam brokers prevail in the binary options industry that preys on beginners by fooling them with get-rich-quick schemes and unrealistic payouts. The Federal Bureau of Investigation (FBI) issued warnings last year about such binary options fraud that resulted in numerous complaints from investors all over the world who reported losses in millions of dollars. The FBI organised the Binary Options Fraud Summit in Jan 2017 at Europol in The Hague where all the regulators and law enforcement official from Europe and North America had gathered to discuss the growing issue of binary options scams.
While some binary options brokers are listed on SEC or traded on a designated contract market which is subject to CFTC (Commodity and Futures Trading Commission) regulations, many of the brokers who operate outside the US do not follow any regulations. Such scam brokers refuse to reimburse the customer deposits and credit their winnings by cancelling any withdrawal requests, ignoring the e-mails and phone calls from customers and sometimes even freezing the customer accounts. The unregulated trading websites are operated by sham brokers who use it to steal money from naive investors. The latest version of AMF’s “Blacklist” features 315 websites of binary options firms who are involved in such fraudulent activities.
The regulations for binary options can vary among different geographic locations and the binary options brokers are supposed to follow the regulations as per the law prevailing in their region. For example, in the US binary options trades can be done only through two authorised exchanges namely Cantor Exchange and NADEX. Similarly,brokers inthe European Union should follow the regulatory established under MiFID(Markets in Financial Instruments Directive) which is a framework for governing the investment intermediaries in the EU.In the same way, Cyprus provides a regulatory framework for binary options in the Middle East.
The Internet Crime Complaint Center (IC3) of the FBI had raised an alarm in 2016 about the growing issue of binary options fraud. They received thousands of complaints from investors who were cheated by fraudulent brokers and reported losses worth millions of dollars. Apart from complaints in the US, many European countries have also reported binary options scams which have forced the regulatory authorities to tighten their rules.
There was a huge crisis in 2016 with numerous cases of binary options frauds reported by investors in EU. All these were due to the lax regulations of CySEC (Cyprus Securities and Exchange Commission). Since the regulations were not that strict, many fraudulent brokers used the loopholes to their advantage and refused to pay back the deposits or winnings to their customers. After Cypriot watchdog had announced tougher rules, CySEC followed the same trend with huge regulatory changes because of which many binary options brokers have lost their traction. Many investors have started closing their binary options trading accounts due to these frauds and the European Securities Markets Authority (ESMA) is enforcing stronger rules on Cyprus watchdog and binary options brokers in the EU region.
In some regions, the regulators are enforcing the complete ban of binary options due to public warnings against certain fraudulent brokers. For example, the FinancialMarkets Authority (AMF) of Quebec unveiled its plans in February 2017 to revise the Derivatives regulation of the Canadian Province to officiallyban the offering of certain categories of binary options to investors of Quebec. Many binary options brokers have closed their operations unable to cope up withthe tougher regulations, and one such example is that of Banc de Binary.
Since CySEC and trade commissions in other regions have not adopted strict regulations during the past years, the sudden imposition of tougher rules is creating difficulties for the binary options brokers. They are finding it challenging to adopt the newer regulations and to make their customers believe that their business in legitimate. They should educate the public that not all binary options brokers are fraudulent. The transformation caused by the regulatory onslaught can bring down scam brokers to some extent while legitimate brokers like anyoption will continue to operate in the same manner.
CySEC announced a huge change in regulations in February for Cyprus Investment firms which offer binary options to investors. They published a circular with the list of proposed regulatory changes to ensure that binary options brokers act in the best interest of their customers. Some regulations include, Strike Prices should be fixed and known to investors in advance, Tenor must be for a period of at least 5 minutes, Graphs in electronic trading platforms should be clear, accurate and comprehensive, historical records of expiration values should be accessible to clients, etc.
In the end, it’s hard to tell how the future of binary options will be and whether the brokers will be able to handle this shift in regulations. Many firms are trying to innovate and re-brand in order to accommodate their services to the latest regulations. For example, “IG markets” which is one of the biggest Forex brokers in the UK has renamed their binary options product to Digital 100s. It clearly shows that even using the term binary options is becoming difficult for legitimate brokers as investors have become completely negative towards it and started thinking that all the brokers offering binary options are fraudulent. Some trading platforms like Copyop offer a lot of benefits for beginners with their social trading platform, but due to some fraudulent brokers, reputation of the entire industry has been adversely affected.
Binary options traders are hoping that the new rules will bring an end to all the scam brokers prevailing in the market and hopefully only genuine and regulated brokers will be able to survive this regulatory onslaught. Investors should do their due diligence and ensure that their broker is regulated by any trading commission before opening an account with them. For example, Investors residing in the US can make use of FINRA’s BrokerCheck tool or check the SEC’s EDGAR database to ensure that their broker is registered with SEC.