Binary Options and CFDs Pose Challenges for Regulators

Too many people seek to get rich overnight but forget that the bigger the gain, the bigger the risk required, and at the end of the day, one needs to apply proper money management.

Trading Binary Options and CFDs

One such class of high-risk investment products are the so-called binary options, where a trader bets a certain amount of money on the outcome of a financial product such as an index, a share, a commodity, or a currency, within a specified time frame.

This type of products, paired with aggressive marketing from the companies licensed to offer them, which do not consider the appropriateness of the individual investor targeted to participate, but only the lure of the commission, usually lead to massive losses for the investors within a short period of time.

Binary options and contract for differences (CFDs) became the usual pitch for call centers spread around the world to avoid regulation, and usually in close relationship with the companies advertised. The market is growing day by day and already has around 1 million clients, and the financial companies that offer these products hold $2.9 billion in clients’ funds as collateral against losses.

Without the proper financial and money management skills, most people engaging in this type of high-risk trading are entitled to lose, a 2018 research by the Australian Securities and Investments Commission (ASIC) confirmed. The regulator found out that 80% of the clients trading binary options are on the losing side, while 72% of those investing into CFDs also lost.

Trading is Not Gambling

The issue is not the instruments themselves, but the people companies easily prey on for fast profits by promising riches that never come, as usually these people do not know the essence of the financial products they engage with.

Salesmen placed in high-pressure target-based working environment steer customers towards trading strategies that are actually designed to make them lose as much as possible, while clients who applied their own strategy and won are generally cut off or being targeted.

Clients often lose not only everything they had but also go into debt, as the salesmen unscrupulously push them towards taking loans for the investments. Worryingly, these scams are allowed to operate by regulators, despite the thousands of complaints received from clients who lost their money and even more.

They became more active only after the FBI in the US brought criminal charges against a company run by Israeli businessman Yossi Herzog, which was accused of fleecing $200 million from customers. In October, the ASIC launched court cases and a court imposed an AU$75 million payment on one of the three companies from the Herzog network operating in Australia, but the fine would never be paid as the cash had gone missing.

This is a particular area where ASIC and the regulators in general should do more to protect vulnerable people from being targeted by these companies. Trading derivatives is not every Joe’s and Jane’s exercise but licensing these companies sends the wrong signal they are safe, and regulators should push their efforts to ensure compliance with certain standards.