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What you Need to Know about Regulating Binary Options

Regulation has failed to keep up with the rapid growth of the Binary Options sector with some adverse results. However, this is changing. It is up to each trader to be aware of the issues.

by Steven Harcourt

If you have ever looked up anything about Binary Options then you won’t have gone far without seeing someone either warning of a particular broker being a fraud or complaining that they have been defrauded out of their money.There is without doubt an important issue here, although I suspect that many of the alleged scams that are reported are actually the result of losses due to inexperienced traders jumping into the market or failing to read the small print in the broker’s agreement.

But why is there so much concern about scams in relation to Binary Options?

The answer can be summed up in a single phrase: a deficiency of appropriate regulation of operators, and brokers in particular. This situation is leading to problems for a two main reasons. First, the ease of trading Binary Options and the low capital requirements mean that they are particularly attractive to inexperienced traders, often traders entering the markets for the first time. As a result, they are targeted at these traders.

However, inexperienced traders are also the most likely to fall for exaggerated promises and least likely to know how to spot fraudulent behaviour until it is too late.The second reason is that the sector has been growing very quickly and so there is a lot of innovation in terms of the products that are offered and the way they are presented. As a result, Binary Options require a form and structure of regulation that is both innovative and adaptive.

It’s not that there has been no regulation.

However, until recently, the regulations that have been introduced have tended to fall into two categories. The first, which will be very familiar to anyone in the US who has looked at the sector, is to simply deem most Binary Options to be inappropriate and to ban them. The problem with this very strict approach is that it opens the field to fraudulent operators who provide services without regulation, but with no competition from licensed brokers.

The second category is the type of regulation that has been provided by CySEC, the Cypriot regulator. This provides a structure for the regulation of Binary Options in the EU and is credible. However, the objective of introducing this regulation was to encourage the growth of the financial services sector in Cyprus and it is always likely that there will be a trade-off between achieving this and providing a comprehensive system. Furthermore, to a trader in an EU country, CySEC regulation does not appear to be a big improvement on no regulation.

The result of these developments is that there are three types of brokers.

The first type are the unregulated brokers. These are flourishing. The advice for a trader is simple. Have nothing to do with them. No matter how attractive may be their offering, you will greatly increase the risks of losing your money if you open an account with an unregulated broker. You are facing enough risk without adding to it.

The second type of broker are those who operate with SEC type regulation. These are precluded from offering European-style Binary Options that return a stated percentage of the risk amount when a trade is successful. These are often described as over-the-counter (OTC) products.These are the most reliable brokers and their number is growing as they must meet these strict criteria of the SEC licence if they wish to trade in the US. Japan is also going in this direction.

The third type are brokers who are licensed to trade in OTC Binary Options. These operate in most countries outside the US and constitute by far the greatest number of licensed brokers. However, while OTC Binary Options are legal in most countries, regulation is provided by only a few authorities. Cyprus has been the most notable, but the UK, Malta and Australia have introduced regulations in the past year or so.

The situation is therefore changing. You can find out more about regulation and download a free eBook on recent developments by clicking here.

Despite this improvement, almost all traders outside the US who wish to deal with a regulated broker must deal with one that is regulated by a foreign authority.

This is clearly not an ideal situation. However, recent developments in the UK and Japan provide some optimism. Japan has decided to follow the US approach in favouring to regulate only exchange traded Binary Options while the UK has reclassified OTC products as financial instruments.

A danger with the former approach is that it could lead to poorly or non-regulated operators continuing to offer products in Japan but there some recent evidence that brokers are reformatting their products to meet the Japanese licensing requirements. A similar development is now also being seen in the US. As a result, the sector is now seeing a situation where regulation has started to drive product development. This is a sign of a sector that is beginning to mature.

Regulators know that there is a balance to be struck

Regulation must be sufficiently strict to protect consumers, that is, traders. The regulations must also be sufficiently strict to allay the fears of people, some of whom may have vested interests, that Binary Options may be more akin to gambling than to investment products.

At the same time, they must also be sufficiently adaptable to allow legitimate operators who wish to provide a good service to be able to compete. The response of brokers in reformatting products and the increasing number of instances of OTC regulation suggest that the authorities may be starting to find this balance. However, much more needs to be done and the focus must be on customer perceptions.

 

Find out more about regulation and download a free eBook on recent developments by clicking here.

 

 

The decision remains the trader's responsibility

 

No matter what is done, regulation cannot fully protect traders. The danger will remain that if stricter regulations are introduced then there will be more space created for unregulated entities to operate.

 

A large responsibility remains with traders to act sensibly. The first requirement is not to fall for pitches that promise big rewards. There is no such surety in trading.

 

And always, no matter how good an offering looks, if the broker is unregulated the trader should always assume they will lose their money if they deal with that broker.

 

The guiding principle remains, as with every other decision in trading, that the trader is responsible for the outcome.


*This post was published according to the "Contributed Article Terms and Conditions"

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