Since the ban on binary options offerings targeting retail investors came into effect, 68% of wholesale clients lost money trading binary options in that period as the product intervention order does not apply to them.
The Australian Securities and Investments Commission (ASIC) has renewed its ban on binary options until 1 October 2031, thus ending any doubt the regulator would reconsider its position on the matter ten years later.
Binary options are over-the-counter derivatives that allow clients to speculate on the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product, a market index or an economic event (such as central bank interest rate decisions).
Binary options are harmful
It was in 3 May 2021 that the product intervention order banning the issue and distribution of binary options to retail clients came into effect.
The decision was successful in preventing retail clients from losing money trading binary options in Australia, the financial watchdog stated, adding that the ban extension will ensure protections remain in line with those in force in comparable markets overseas.
ASIC Deputy Chair Karen Chester said: “Binary options are harmful, high-risk financial products resulting in millions of dollars in losses for retail investors before our ban. Extending our binary options ban until 2031 ensures this important protection for retail investors will continue.”
Using data from five licensed binary option issuers, ASIC released a report summarizing the impact of the order introduced in May 2021. In the 13 months prior, ASIC found that retail clients incurred significant aggregate net losses trading binary options:
- 74–77% of active retail clients lost money trading binary options
- retail client accounts made net losses of $14 million in aggregate
- loss-making retail client accounts made net losses totalling $15.7 million, while profit-making retail client accounts only made net profits of $1.7 million.
The ban has been effective in reducing the risk of significant detriment to retail clients resulting from binary options, according to the regulator, who reminds the industry that retail clients have not made any losses (or profits) from trading binary options with licensed issuers since the product intervention order took effect.
By comparison, 68% of wholesale clients lost money trading binary options in that period as the product intervention order does not apply to them.
80% of retail clients lost money trading binary options
ASIC found that, between 2017 and 2019, 80% of retail clients lost money trading binary options. In addition, this product is likely to result in cumulative losses to retail clients over time because of the following product characteristics:
- an ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client loses their entire investment
- short contract duration (e.g. the average contract duration of binary options traded with one provider was less than six minutes)
negative expected returns (i.e. the present value of the expected payoff for a binary option contract is lower than the initial investment).
ASIC’s actions to address concerns about binary options have included enforcement action to address misconduct, public warning notices and other statements, surveillance projects and thematic reviews, stronger regulations, and extensive retail client education campaigns and guidance for binary option issuers.