An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
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 CyprusSecurities 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 neverregistered 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:
- See if the binary options trading platform has registered the offer and sale of the product with the SEC. Registration provides investors access to key information about the terms of the product being offered. You can use EDGAR (www.sec.gov/edgar/searchedgar/webusers.htm) to determine whether an issuer has registered the offer and sale of a particular product with the SEC.
- See if the binary options trading platform itself is registered as an exchange. To determine whether the platform is registered as an exchange, you can check the SEC website regarding Exchanges at www.sec.gov/divisions/marketreg/mrexchanges.shtml.
- See if the binary options trading platform is a designated contract market. To determine whether an entity is a designated contract market, you can check the CFTC website at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations&implicit=true&type=DCM&CustomColumnDisplay=TTTTTTTT.
- Finally, before investing, check out the registration status and background of any firm or financial professional you are considering dealing with at FINRA BrokerCheck (www.finra.org/investors/tools calculators/brokercheck/) and BASIC Search (www.nfa.futures.org/basicnet), the National Futures Association Background Affiliation Status Information Center. If you cannot verify that they are registered, don't trade with them, don't give them any money, and don't share your personal information with them.
READ:
- "Investor Alert Binary Options and Fraud" (SEC Pub. No. 148 (6/13) 5 pages)
- SEC v. Banc of Binary (DNV,13-cv-00993, June 5, 2013)