Home What Caused The Ban Of Options Trading and What To Expect Next?

What Caused The Ban Of Options Trading and What To Expect Next?

It has been a ‘short’ time coming, but binary trading is officially dead and buried. Not totally gone from the online trading market however, as there still exists greedy unregulated brokers who promote options trading. So how did binary options trading, this very much detested financial instrument, come to an abrupt end?

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The Emergence

Binary Options trading gained popularity in the year 2008, and instantly spread like wild-fire through the financial market. The trading system had been promoted by avaricious brokers whose main aim was to gain money from low-risk hungry traders. Binary options brought more wealth to few traders than it brought losses to the vast trader populace. Somehow, the binary options brokers were able to stay afloat by claiming to have struck a balance between financial investment and gambling. With the unique quality of an all-or-nothing trading system, they were able to lure many into believing they could get rich quick just by making simple predictions on the values of virtual financial assets.

At some point in time, you may have noticed various spammy photos of expensive cars and lavish homes popping up on different parts of the internet. If you resisted the opportunity to invest in binary options trade at the time; then you’ve dodged a bullet. If not, we’re terribly sorry for your financial loss. You’ll be happy to hear that binary options trading has officially lost the endorsements of European market regulators.

But you have to admire the craftiness of the whole scheme. Binary option trading took the market by storm, presenting the opportunity for frustrated traders to make trades on leveraged financial instruments. At the time, mobile trading technology had greatly improved the trading market, making it easier for traders to monitor their positions anywhere at any time. Soon enough, popular influencers took to social media to endorse new obscure brokers and this encouraged binary options trading.

At first it seemed a brilliant idea to create a trading system where customers had the free reigns to gamble their money on assets with predictable values. But people soon became alerted to the crookedness of these binary option brokers. It wasn’t long before this exploitation of ignorant traders caught the attention of regulators in the UK and across Europe.

The Collapse

The European Securities and Markets Authority (ESMA) sanctioned a ban on binary options on 2 July 2018; and after much review, renewed the ban on 2 April 2019. This ban effectively prohibits every form of marketing, distribution and sale of binary options to retail clients. In fact, ESMA clamped down so hard on binary options that Contracts-for-Difference (CFD’s) may soon face some restrictions as well.

There is a huge difference between binary options and CFDs however. While binary option trading is basically a gamble weighed on the values of a specific financial asset, Contracts-for-Difference (CFD) is principled on spread betting, i.e. the difference between the opening price of an asset and the closing price at the termination of a trading contract. You will be able to find more information about CFD trading in this article here. CFDs are just as addictive as broker options trading but very legitimate. You can find more about CFDs in this article

Here’s why binary options trading is a queer trading system. A trade is a bet that the value of an asset will rise or fall within a fixed timeframe; in some cases, could be one minute or a mere 30 seconds. Now, ask yourself, how could a person possibly know for certain the price fluctuations of an asset without the occurrence of an economic announcement? It’s simply a game of chance; and that doesn’t fly well with the securities exchange.

But novices in the online trading business didn’t know this. Traders new to the game always want to get rich quick, making them liable to jump at sleazy adverts promising them ownership of a range of luxury cars and homes in ‘one day’. Binary options traders even went further and offered demo accounts with tons of virtual cash to get the ball rolling. And if that didn’t work, they offered gifts and discounts on high multiples of trading deposits. Like gambling, the lure to fish out cash to make more was extraordinarily rampant.

Gambling isn’t wrong, is it? No, at least not in America. But regulators were concerned about the shallow business models of many binary options trading firms. And with enough probing and investigation, they discovered that manipulation and scamming was deeply embedded into the workings of many binary options trades. Client protection was needed against these binary options providers.

Statistics Backing the Ban on Binary Options

Before you call out ESMA for their ban on binary options trading, you need to understand that there was no winning in binary options trade. First, traders lost all their stakes if the market moved against them. Second, if the market moved in their favour, they could only withdraw a paltry sum of their profits with their initial stake locked on for more trades. Thirdly, the brokers earn when the trader loses a trade. The system was truly madness.

In the first half of 2017, the City of London Police stated that about 700 people reported losing money to binary options – the amount, an estimated £18m.

The Financial Conduct Authority, in 2016, estimated that around 82% of clients trading CFDs lost an average of £2,200. With people having lost so much through CFD, a legitimate trading business, just imagine how much people lost from binary options, an illegitimate business.

Binary options providers or brokers were often found guilty of tweaking option contracts. When a customer closed a favourable trade, they would alter the prices of the underlying asset so that profits turned to loss. Alternatively, they extended the expiration of the contract by a few seconds or minutes so that they could avoid paying winnings to successful customers. Eventually, fraudsters replicated top options brokers and collected money from prospective traders only to cease contact after receiving the money.

Stretching as far back as 2012 till now, about 2600 victims were reported to have lost over £20,000 on average.

Conclusion

Although the ban on binary options trading is now in effect, analysts believe it will only push the business underground. Furthermore, ESMA’s ban is slated to end after three months, with a further 3 months extension on the cards. Big social platforms like Google, Instagram, Facebook and Twitter have already imposed bans on binary options ads. Alas, if other national regulators don’t get the picture after that and impose a ban on binary options trading in their own countries, there’s no telling what its resurgence would bring.