Binary options: taking a gamble on the financial market
As it's revealed that more people are losing money to binary scams, Felicity Hannah explores the world of binary options and explains how to avoid potential pitfalls.
Are users of binary options websites investors or gamblers? Punters or victims? Fools or visionaries?
It’s a debate that has gone to the heart of this country’s Parliament as MPs express concern and the UK’s Financial Conduct Authority (FCA) has issued warnings that it does not and cannot regulate the websites and firms offering such opportunities.
What's more, the City of London Police has warned that more people are losing cash as a result of binary trading scams, with the average loss a staggering £26,000.
What is binary options ‘trading’?
To find out more about binary options, I visited the website of a binary options platform that was recently slammed in parliament by MP Mike Freer, when he called upon the leader of the House of Commons to arrange a debate on regulating binary options trading.
I watched three ‘educational’ videos on the site, where I learned that “trading in binary options is rapidly becoming one of the most popular ways to invest no matter what your financial goals may be”.
The next video claimed that binary options are simple and easy to understand but come with limited risk and predetermined returns. The third told me the great thing is that you can trade at any time.
However, I still wasn’t clear on precisely what was being offered, so I tried a few more binary options websites; all lead with the large amounts of money I could make with no real reference to the risks involved.
Eventually, I visited the Financial Conduct Authority’s website and received an impartial description:
“Binary options are a form of fixed-odds betting on movements in financial markets.
Typically a trade in binary options involves a simple question of whether an event will happen or not – for example, will the price of a particular share or asset go up. The outcome is either yes or no, hence the term binary option.
“If the investor is correct, they ‘win’ and should see a return on their investment. If the investor is wrong, they lose their full investment.”
Why the concern?
Okay, so it’s a massively high-risk strategy that is legally defined as a gamble rather than an investment.
But that doesn’t necessarily make it a scam. If punters are willing to invest their money into a gamble that could easily mean they lose every penny then it could be argued that that is their business.
If they understand the risks and are content then they are adults who can make decisions, after all. Of course, there are still serious questions to be asked about whether the risks are adequately explained to everyone.
But the main trouble is that fraudsters have leapt onto the growing popularity of binary options in order to scam people out of their money whether they win or lose.
The National Fraud Intelligence Bureau Proactive Intelligence Team interviewed a convicted fraudster about how these scams work.
He said: “Binary options are the new investment scam. Platforms are set up all the time to appear legitimate but are actually fake. Companies operating these fake binary trading platforms make 100% profit - a percentage of which goes to the brokers and the remainder to the rest of the company.
“Victims who invested never see any returns and when the customers attempt to withdraw funds it’s made very difficult for them to do so and at times the company ignores them completely ceasing all contact.”
Or is it a few bad apples?
Regular gamblers are concerned that calls for increased regulation could see an industry shut down, when they understand the risks and want to continue. Some are worried that calls for increased regulation could see the baby thrown out with the bathwater.
One real-life trader told The Finance Magnates website: “There are actual traders, smart investors, who want to trade binary options and didn’t get sucked into the trading world because of a fishy advertisement they saw somewhere.
“What it will really take is an international effort and cooperation among the many different regulators, and forms of binary options trading. With that said, I suppose it’s time for all of us traders, as a community, to demand better regulations worldwide!”
Perhaps he’s right and the appropriate regulation can only come if law enforcers are united globally in a crackdown. But certainly, when the inevitable regulation comes it will be essential that regulators talk to satisfied punters – and they exist - about their experiences and how to protect them without curtailing their activity.
So how can you stay safe?
If you’ve read all this and decided that you would like to gamble your money with binary options then how do you avoid the scammers and stick to the legitimate sites?
The FCA strongly recommends that if you choose to go down this route you deal with a firm that is based in Great Britain and has a current licence to offer bets on binary options from the Gambling Commission.
However, if you do so then you need to be aware that this area is not covered by the FCA and so there will be no recourse to the complaints and compensation schemes.
The Gambling Commission states that licensed operators must make it clear on their websites that they are licensed by the Commission and has a register of licences that can be easily checked.
If you choose to use an overseas company then it recommends a European Economic Area firm that is authorised to deal in binary options and is supervised by its member state. If you choose to use a non-European company then, again, it is essential you choose a firm that can show it is authorised or licensed and supervised in its home country.
Otherwise, the dangers can be substantial. One victim told Action Fraud: “I opened an account and deposited £3,300. The account grew and showed good returns. I was offered a higher ranking account with more benefits if I increased the amount to £33,000. All the transactions were done by debit from two of my credit cards. I was given their bank details to enable me to do a wire transfer, but did not use that function.
“I received many bonuses and profits from block trades but I am unable to recover my deposits or profits from trades or bonuses”
Gambling safely
City of London Police Commander Chris Greany, who’s also the national coordinator for economic crime, says: “Investments fraudsters will do everything they can to obtain large amounts of money; in this case they have taken advantage of an unregulated market and convinced their victims that they are making worthwhile investments.
“Anyone who invests in binary options should be vigilant about who they are trading with and should follow our protection advice to ensure that they don’t fall victim to what is becoming a commonplace investment scam.”
When done properly, binary options are a high risk gamble that makes money for some but loses substantial amounts for others. When done badly and illegally they are smokescreens for the worst kinds of fraudsters. And whether interested people are investors or gamblers, they need to understand the risks of both the legitimate websites and the dangers of scams.
What do you think? Would you consider investing or gambling this way? Do high rewards justify high risks? Share your thoughts and experiences using the comments below.
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