Financial watchdogs are concerned that many firms offering binary options are scams and that the odds of winning are stacked against investors.
As a result, the Financial Conduct Authority is stepping in to take over regulation of the market to crack down on the crooks and make trading fairer for speculators.
From January 3, 2018, binary options operations will have to register with the FCA or with regulators in another European Economic Area country.
Regulation means consumers can complain to the Financial Ombudsman and are protected under the Financial Services Compensation Scheme, although trading losses are not safeguarded.
What are binary options?
Binary options are bets on the price of any asset that can be measured financially, such as the price of a share, commodity or currency.
Speculators bet on the market rising or falling within a set time. If they correctly predict the change, they win, if not, they lose.
What are the odds of winning?
That can vary between bets, but an FCA audit of binary option results revealed most consumers lose and the chances of having a winning run across several bets is slim.
What are binary option scams?
Fraudsters often advertising on social media set up binary option operations designed to rarely pay out.
They offer high odds, but the software is rigged to manipulate prices and pay-outs, says the FCA.
Many reportedly fail to settle winning bets and close customer accounts without returning their cash.
The five binary option risks
The FCA wants to supervise the binary options markets to tackle five concerns:
- Trading losses as customers seem unlikely to win because they need a ‘sophisticated knowledge’ of financial markets and a degree of luck to beat the odds to come out on top
- Complicated analysis and many transactions taking place in a few seconds make informed decision making almost impossible
- Binary options are really a gamble, and as such can become addictive for consumers who can build significant losses in a short time
- The organisers make money when consumers lose, which leads to a conflict of interest and encourages firms to work against customers
- More than 2,600 consumers have lost £60 million to fraudsters running binary option scams since 2012