Regulators Warn Investors of Binary Options Risks

Trading binary options can be an extremely risky proposition. Unlike other types of options contracts, binary options are all-or-nothing propositions. When a binary option expires, it either makes a pre-specified amount of money, or nothing at all, in which case the investor losses his or her entire investment. Trading binary options is made even riskier by fraudulent schemes, many of which originate outside the United States.

Hacker Causes an Alert
Trading binary options is
made even riskier by
fraudulent schemes, many
of which originate outside
the United States.

Through its FINRA Securities Helpline for Seniors – HELPS® staff at the Financial Industry Regulatory Authority, Inc. (FINRA) has received a number of calls from concerned investors that suggest that scams involving binary options and their trading platforms abound. The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have received investor complaints about similar problems. In an investor alert, FINRA cautions those who are considering binary options to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches, and demo accounts that allow users to try their hand at binary options trading without risking personal assets. Such accounts can serve as bait to lure investors into sending money to fund a "real" trading account, or open the door to identity theft, by requesting an array of personal information.

Investors who have already opened an account should be alert to signs of fraud. These include pressure to send additional money, and excuses for why the firm cannot credit gains to a customer's account, close an account or send purported gains to the investor.

SEC Enforcement Actions Involving Binary Options

The SEC's Division of Enforcement recently brought charges against a company for failure to register the securities and failure to register with the SEC as a broker before offering and selling binary options to U.S. investors, as required. Moreover, the binary options seller allegedly misrepresented the risk of investing in binary options sold on its trading platforms. While the seller's websites stated that investing in the binary options that it offered and sold is profitable, in fact less than 3 percent of its customers in the U.S. earned a profit trading binary options sold by the respondent.

This follows an earlier case in which the SEC reached an $11 million settlement with a binary options seller alleged to have solicited U.S. investors through methods including YouTube videos, spam emails, and advertising on the Internet. The seller also communicated with U.S. investors by phone, email, and instant messenger.

The SEC issued an investor alert offering a number of red flags to look out for when it comes to binary options schemes:

  • High-pressure sales tactics or threats. Representatives of binary options websites may use high-pressure sales tactics or even threats (for example, threatening to file a lien against your property) to swindle you.
  • Credit card abuse. If you used a credit card to fund your account, keep an eye out for unauthorized charges on your credit card statements. Even if you signed a form purportedly waiving your right to dispute any credit card charges, report all unauthorized charges to your credit card company immediately. The SEC also notes that representatives of binary options websites may use delay tactics to hold up your withdrawal request until it is too late for you to dispute the charge(s) with your credit card company.
  • Constant turnover of representatives. Be skeptical if the names of the persons you are dealing with at a binary options website seem to change frequently or if you are told your former “broker” has been fired.

Cautions from the CFTC

The CFTC has also made clear through a Fraud Advisory and recent article posted to its SmartCheck site the potential pitfalls related to binary options. The CFTC notes that market experts have seen a rise in the software platforms that tend to target over-the-counter binary options that are not CFTC-regulated. These require only a counterpart of the trade who is a broker or an option contract. Since the risk of fraud, manipulation, and abuse is very real, the CFTC recommends asking any firm operating binary options platforms some pointed questions:

  • Where are you based and do you have a U.S. location?
  • Are customer funds held in segregated accounts in a major U.S. bank? Which one?
  • Can I withdraw your funds at any time?
  • Do you ever profit because a customer on the other side lost?

Before investing in binary options, take the following precautions:

  • Check the CFTC's website to see if the binary options trading platform is a designated contract market—currently there are only three such markets offering binary options.
  • Check the SEC's website regarding exchanges to determine if the binary options trading platform is registered as an exchange. Search registered trading platforms to determine whether or not a binary options product you may have heard about is listed.
  • Use FINRA BrokerCheck® and the National Futures Association's Background Affiliation Status Information Center (BASIC) to check the registration status and background of any firm or financial professional that you are considering.

Unless you can verify the registration status of the trading platform, products, firms and financial professionals, do not trade with them, do not send any money, and do not provide your personal information.

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