Binary Options Now On Regulatory Radar

June 10, 2013

A binary option contract is a "Yes/No" proposition that is usually tied to a specific price of the chosen underlying asset. Typically, the strike price involves a bet that the option will expire above a price at a specified time and specified date. Unlike more traditional options, binary options do not give the holder the right to purchase or sell the underlying asset. Upon expiration of a binary option, the holder receives either a pre-determined amount of cash or nothing at all.
Although some binary options are listed on a U.S. regulated registered exchange or traded on a designated contract market, investors are learning that such is not always the case. With the emergence of so-called Internet-based trading platforms, investors are often learning that the game is rigged and appearances are not what they seemed. 

Case In Point

On June 6, 2013, the SEC filed a Complaint in federal court in Nevada charging that Banc de Binary Ltd. (Cyprus) has been offering and selling binary options to investors across the U.S. without first registering the securities as required under the federal securities laws. The Complaint offers the following background:

7. Banc de Binary is based in the Republic of Cyprus and regulated by the Cyprus
Securities and Exchange Commission ("CySEC"). Based on its registration with CySEC, Banc de Binary has obtained reciprocal licenses in several other countries in the European Union, including Germany, Spain and the United Kingdom, but not in the United States. From 2010 until at least January 2013, Banc de Binary maintained a virtual office on Wall Street in New York City, and listed that address on its website and in emails from purported Banc de Binary representatives to Banc de Binary customers.
8. Banc de Binary has never registered with the SEC in any capacity. It also never
registered any offering of securities that it has offered or sold.

The SEC alleged that the company has broadly solicited U.S customers by advertising through YouTube videos, spam e-mails, and other Internet-based advertising. Banc de Binary representatives have purportedly communicated with investors directly by phone, e-mail, and instant messenger chats. The Complaint further alleges that Banc de Binary also has been acting as a broker when offering and selling these securities, but failed to register with the SEC as a broker as required under U.S. law.

Three Emerging Complaints

The Securities and Exchange Commission's ("SEC's") Office of Investor Education and Advocacy recently issued an excellent Investor Bulletin about binary options: "Investor Alert
Binary Options and Fraud" (SEC Pub. No. 148 (6/13) 5 pages).  

The SEC and the Commodity Futures Trading Commission have received increasing numbers of fraud complaints pertaining to binary options trading on websites.  Such complaints have been grouped into three categories:
  • refusal to credit customer accounts or reimburse funds to customers;
  • identity theft; and 
  • manipulation of software to generate losing trades.
Do Your Due Diligence!

Before investing in binary options, the SEC offers the following precautions: