Binary Options Trading: NADEX or Nada, SEC Warns
“To date, only one entity that offers binary options has been granted status as a designated contract market—the North American Derivatives Exchange, Inc (NADEX). All other entities that are offering binary options that are commodity options transactions are doing so illegally.”
The Securities and Exchange Commission, in an investor alert issued on June 6, 2013, has made it very clear. This is important in the light of recent fraud complaints received by the agency related to online binary options brokers with dubious practices. Chief among these complaints are the refusal to credit customer accounts or reimburse funds to customers, identity theft, and manipulation of software to generate losing trades.
For a clear idea of what binary options are, read the primer “Binary Options Trading: An All or Nothing Gamble? ” that explains the concepts behind this investment option in greater detail. Essentially, binary options involve a yes/no proposition. Will the price of an options contract rise above specified price? Will it fall below? Your yes or no answer to either of those questions will determine whether you’re in-the-money (win) or out-of-the-money (lose) when the contract expires.
Each binary options contract also specifies a predetermined reward for a winning guess. If you guessed incorrectly, you either lose all of your investment or you get back only a very small fraction of it. This is why binary options are often referred to as “all-or-nothing options” or “fixed-return options.” Read Binary Options: The Way to Play for a detailed explanation of the odds and how the binary options game should be played to increase your chances of winning.
Binary options are a legitimate investment, usually employed by investors to hedge against an opposite position in normal options trading so that losses are minimized. If an investor is confident of his position, he can use binary option to rev up the earnings from that position. If legitimate, why then the complaints?
Beware of binary options fraud
Only a small portion of binary options are traded in exchanges regulated by the US government through the SEC or the US Commodity Futures Trading Commission (CFTC ). According to SEC, “much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable US regulatory requirements and may be engaging in illegal activity.” These fraudulent activities include:
Irregular fund management
To participate in online binary options trading, the consumer has to open an account an online broker and deposit a minimum amount. This amount is used by the trader to buy options. Amounts are credited or debited from the account depending on the performance of a contract. Customers complain that Internet-based binary options trading platforms do not credit earnings to customer accounts or reimburse funds after accepting customer money.
Customers that have been victims of this suspect that many operators simply do not have enough funds to cover losses. Lack of proper regulation means that for as low as $20,000 people can open an online trading platform and may not have sufficient cash to cover losses on contracts where more customers are “in-the-money.”
These online operators do not charge commissions and will only make money if customers are “out-of-the-money.” Telephone calls and s are ignored when customers complain that they can’t withdraw money from their accounts, or are settled many weeks after the request was made.
Identity theft
Some platforms collect credit card and driver’s license information without specifying the purpose. Customers are advised never to provide financially sensitive data to these online trading platforms. A recent spate of scandals involving the unauthorized withdrawal of millions of dollars from ATM accounts should be enough warning to all.
Manipulation of trades
This usually involves manipulating the expiry date or time of contracts so that the customer finishes out-of-the-money. There have been numerous complaints about “winning” contracts that eventually ended on the debit side when the expiry was extended.
All that’s for plain fraud, when the online broker has every intention of shortchanging the customer. But what if the operation is illegal in the first place, or non-compliant to government regulations? Then, this transfers the burden of responsibility to the customer, because while the government can run after entities operating illegally it is under no obligation to enforce a non-legal agreement.
For example, the binary options contract may be based on the price of a company’s securities, and securities may not be offered or sold without registration, unless an exemption from registration is available. Also, binary options trading platforms may be operating as unregistered broker-dealers without SEC’s approval.
If the platform offers options on commodities and requires a margin (deposit) for participation, then the broker needs to be registered as a Futures Commission Merchant. If the contract being offered is for foreign exchange to customers with less than $5 million net worth, then the platform must be registered as a Retail Foreign Exchange Dealer.
SEC’s warning is clear. “You may not have the full benefit of the safeguards of the federal securities and commodities laws that have been put in place to protect investors, as some safeguards and remedies are available only in the context of registered offerings. In addition, individual investors may not be able to pursue, on their own, some remedies that are available for unregistered offerings.”
Protection vs. binary option fraud
You’ll have to look out for yourself and do the homework to ensure that you don’t fall victim to unscrupulous online binary options traders. SEC offers the following advice:
Beware. Most Internet-based binary options trading platforms are operating outside of US regulations.
Don’t invest in something you don’t understand. Read the fine print. If you still don’t get, don’t let go of the precious cash
Check the SEC’s EDGAR database to see if the product being offered is registered.
Check to see if the online trading platform is registered as an exchange .
Check the CFTC listings to see if the online platform is a designated contract market.
Use the FINRA Broker Check service and the BASIC Search service to check on the online broker’s records and history. If they’re not listed at all, hold on to your money. Better yet, send SEC or CFTC and .
Binary options trading is being marketed aggressively these days, and a simple Google search won’t give you the answers you need because online brokers are dominating the top results. While there is money to be made, don’t rush in blindly. There’s a right way and a wrong way to go about it. If you’re trading in NADEX, you should be safe. If not, nada. Not good. Not good at all. Read the full text of SEC’s investor alert .
Binary options too exotic for you?
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