The SEC’s Office of Investor Education and Advocacy and the Commodity Futures Trading Commission’s Office of Consumer Outreach (CFTC) are issuing this Investor Alert to warn investors about fraudulent promotion schemes involving binary options and binary options trading platforms. These schemes allegedly involve, among other things, the refusal to credit customer accounts or reimburse funds to customers, identity theft, and manipulation of software to generate losing trades.
Binary options differ from more conventional options in significant ways. A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yes/no proposition. The yes/no proposition typically relates to whether the price of a particular asset that underlies the binary option will rise above or fall below a specified amount. For example, the yes/no proposition connected to the binary option might be something as straightforward as whether the stock price of XYZ company will be above $9.36 per share at 2:30 pm on a particular day, or whether the price of silver will be above $33.40 per ounce at 11:17 am on a particular day. once the option holder acquires a binary option, there is no further decision for the holder to make as to whether or not to exercise the binary option because binary options exercise automatically. Unlike other types of options, a binary option does not give the holder the right to purchase or sell the underlying asset. When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all. Given the all-or-nothing payout structure, binary options are sometimes referred to as “all-or-nothing options” or “fixed-return options.”
Binary Options Trading Platforms
some binary options are listed on registered exchanges or traded on a designated contract market that are subject to oversight by United states regulators such as the seC or CFtC, respectively, but this is only a portion of the binary options market. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.s. regulatory requirements. The number of Internet-based trading platforms that offer the opportunity to purchase and trade binary options has surged in recent years. The increase in the number of these platforms has resulted in an increase in the number of complaints about fraudulent promotion schemes involving binary options trading platforms. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.s. regulatory requirements and may be engaging in illegal activity. Investor Assistance (800) 732-0330 www.investor.gov typically, a binary options Internet-based trading platform will ask a customer to deposit a sum of money to buy a binary option call or put contract. For example, a customer may be asked to pay $50 for a binary option contract that promises a 50% return if the stock price of XYZ company is above $5 per share when the option expires. If the outcome of the yes/no proposition (in this case, that the share price of XYZ company will be above $5 per share at the specified time) is satisfied and the customer is entitled to receive the promised return, the binary option is said to expire “in the money.” If, however, the outcome of the yes/no proposition is not satisfied, the binary option is said to expire “out of the money,” and the customer may lose the entire deposited sum. There are variations of binary option contracts in which a binary option that expires out of the money may entitle the customer to receive a refund of some small portion of the deposit—for example, 5%—but that is not typically the case. In fact, some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect, given the payout structure. For instance, in the example above, assuming a 50/50 chance of winning, the payout structure has been designed in such a way that the expected return on investment is actually negative, resulting in a net loss to the customer. This is because the consequence if the option expires out of the money (approximately a 100% loss) significantly outweighs the payout if the option expires in the money (approximately a 50% gain). In other words, in the example above, an investor could expect, on average, to lose money.
Investor Complaints Relating to Platforms Fraudulent Binary Options Trading platformes
The seC and CFtC have received numerous complaints of fraud associated with websites that offer an opportunity to buy or trade binary options through Internet-based trading platforms. The complaints fall into at least three categories: refusal to credit customer accounts or reimburse funds to customers; identity theft; and manipulation of software to generate losing trades. The first category of alleged fraud involves the refusal of certain Internet-based binary options trading platforms to credit customer accounts or reimburse funds after accepting customer money. These complaints typically involve customers who have deposited money into their binary options trading account and who are then encouraged by “brokers” over the telephone to deposit additional funds into the customer account. When customers later attempt to withdraw their original deposit or the return they have been promised, the trading platforms allegedly cancel customers’ withdrawal requests, refuse to credit their accounts, or ignore their telephone calls and emails. The second category of alleged fraud involves identity theft. For example, some complaints allege that certain Internet-based binary options trading platforms may be collecting customer information such as credit card and driver’s license data for unspecified uses. If a binary options Internet-based trading platform requests photocopies of your credit card, driver’s license, or other personal data, do not provide the information. The third category of alleged fraud involves the manipulation of the binary options trading software to generate losing trades. These complaints allege that the Internet-based binary options trading platforms 2 Investor Assistance (800) 732-0330 www.investor.gov 3 manipulate the trading software to distort binary options prices and payouts. For example, when a customer’s trade is “winning,” the countdown to expiration is extended arbitrarily until the trade becomes a loss.
Unregistered Transactions, Operations, Broker-Dealers, or Trading Exchanges; Illegal Options Transactions
In addition to ongoing fraudulent activity, many binary options trading platforms may be operating in violation of other applicable laws and regulations, including certain registration and regulatory requirements of the SEC and CFTC, as described below. Certain Registration and Regulatory Requirements of the SEC For example, some binary options may be securities. Under the federal securities laws, a company may not lawfully offer or sell securities unless the offer and sale have been registered with the SEC or an exemption from such registration applies. For example, if the terms of a binary option contract provide for a specified return based on the price of a company’s securities, the binary option contract is a security and may not be offered or sold without registration, unless an exemption from registration is available. If there is no registration or exemption, then the offer or sale of the binary option to you would be illegal. If any of the products offered by binary options trading platforms are security-based swaps, additional requirements will apply. In addition, some binary options trading platforms may be operating as unregistered broker-dealers. A person who engages in the business of effecting securities transactions for the accounts of others in the U.S. generally must register with the SEC as a broker-dealer.
If a binary options trading platform is offering to buy or sell securities, effecting transactions in securities, and/or receiving transaction-based compensation (such as commissions), it likely should be registered with the SEC. To determine whether a particular trading platform is registered with the SEC as a broker-dealer, visit the FINRA BrokerCheck website (www.finra.org/ investors/toolscalculators/brokercheck/). Some binary options trading platforms may also be operating as unregistered securities exchanges. This would be the case if they matched orders in securities of multiple buyers and sellers using established nondiscretionary methods. However, there are cases where a registered broker-dealer with a trading system or platform may legitimately have no obligation to register as an exchange. Certain Registration and Regulatory Requirements of the CFTC It is illegal for entities to solicit, accept offers, offer to or enter into commodity options transactions (for example, foreign currencies, metals such as gold and silver, and agricultural products such as wheat or corn) with U.S. citizens, unless those options transactions are conducted on a designated contract market, an exempt board of trade, or a bona fide foreign board of trade, or are conducted with U.S. customers who have a net worth that exceeds $5 million. To see the most recent list of exchanges that are designated as contract markets, check the CFTC website. There currently are only three designated contract markets offering binary options in the U.S.: Cantor Exchange LP; Chicago Mercantile Exchange, Inc.; and the North American Derivatives Exchange, Inc. All other entities offering binary options that are commodity options transactions are doing so illegally.
Source – https://www.sec.gov/investor/alerts/ia_binary.pdf