Often criticized as being not more than pure gambling and speculation the field of the online retail trading of binary options has been booming over recent years and it has greatly evolved and increased especially since 2008,the year when one jurisdiction and its regulator, namely the Cyprus Securities and Exchange Commission (CySEC) took the decisive move to recognize binary options trading as an investment vehicle and started licensing brokers to offer such services.
Ever since, Cyprus became a very popular hub for binary options brokerages, especially since entities licensed in Cyprus could gain easy access to all the European Union markets through the EU’s relevant license passporting agreement. CySEC has often come under fire, by industry stakeholders and even by other regulators for being too lenient with brokers and for not regulating and controlling their operations effectively. Moreover, the CySEC license was often seen as a “flag of opportunity”, attracting accusations that tarnished the image both of the local regulator and of the country as a jurisdiction as a whole.
Resolved to reverse this bad image and clear its name and fame, CySEC has shown several signs of toughening up its position against brokers by conducting more onsite inspections as well as fining culprits and suspending or cancelling licenses.
However, through a recent move, the Cyprus watchdog seems to be taking thins one step further, planning to impose changes that might make it much less attractive to binary options brokers and set to drastically change the landscape of binary options trading as a whole.
This move came on 14 December 2015 through a letter addressed to all CIFs supervised by CySEC calling them to express their comments and suggestions on a series of proposed changes in the regulatory framework of binary options trading, which the regulator claims will make the reception and execution, or transmission, of orders fully transparent and fair to clients. And although the objective sounds noble enough, the changes themselves, to which CIFs have to reply until 31st December 2015, seem to interfere and try to amend the fast pace of binary options trading that brokers boast of and may traders seem to prefer.
More specifically, in its consultation paper CySEC refers to a series of accepted practices applied in binary options trading platforms used by CIFs, noting that the list is not exhaustive and that the CIFs are requested to establish and implement additional arrangements/procedures, having in mind the need for full transparency and protection of clients’ interests.
Perhaps the most notable of the measures included in the paper are the obligation of brokers to offer a cancellation option after every transaction and the clarification that binary options with duration of 30 and 60 seconds are not considered within the mandate of the investing services law. If implemented and the regulator insists on the changes and the full compliance of brokers then we may just be looking at a major overhaul in the industry, or at least its regulated segment, since an unregulated one is also very well alive and kicking, that may mean that it will be viewed less as gambling but that at the same time it will become less attractive for brokers as well as traders.
For the plethora of binary options traders around, especially those trading through CySEC licensed brokers, let us have a closer look at what the regulator is seeking that brokers should be doing:
- Information on the identification of the underlying asset of the binary option
Providing clients with sufficient information regarding the identification of the underlying asset of the binary option, including the trading venue [e.g. WTI Crude Oil (Dec 15) NYMEX].
- Information regarding bid and ask prices of the underlying asset of the binary option – Strike price of the binary option
- Providing to clients a continuous (per second) and smooth presentation of the flow of the bid/ask prices of the underlying asset of the binary option throughout the lifetime of the asset, such as those taken by the feed provider.
- Disclosure of the bid/ask prices of the underlying asset of binary option in a prominent way in the trading platform. For example, disclosure of the bid/ask prices on the area where the exercise price is presented, in which clients may buy the binary option.
- Adequate explanation/description of the bid/ask, and strike, prices in a prominent way in the trading platform (e.g. via a pop-up message).
- Where the strike price differs from the average bid/ask price, a clear notification of it, as well as the deviation between the two prices, at absolute value and at least at the purchase of the binary option, on the area where the strike price is explained/described.
- In case where bid/ask prices are not available for certain underlying assets (e.g. index DAX and FTSE 100), presenting the last price of the binary option and clearly indicating the trading venue.
- Publication of the feed provider details, e.g. in the pop-up where the bid/ask price is explained/described.
- Information on the bid/ask, and/or last, prices, at the expiry of the binary option – Expiry price of the binary option
- Providing to clients the bid/ask, and/or last, prices at the expiry of the binary option.
- Adequate explanation of the expiry price of the binary option and the methodology used to determine the expiry price.
- Maintaining historical records with the bid/ask, and/or last, prices at the expiry of the binary option, which they are accessible by clients.
- The above information is concentrated in a prominent way in the trading platform.
- Explanation of the graphs presented to clients
The graphs presented in the trading platforms are accurate, clear and understandable to the average investor as to the describing illustrations. For example, when the buyout, or average bid/ask, prices are presented, a clear reference to the price presented and explanation of the graph.
- Information on the availability of the binary option
- Possibility of entering buy orders of binary option (call and put), at any time and for any binary option that is available.
- In the case of unavailability of purchasing a binary option (call and put), clear and visible information on this fact, as well as the circumstances/conditions under which this product is not available, before clients enter a buy order.
- Buyout option of the binary option from a CIF
Providing clients a buyout option of the binary option from the CIF. Full and accurate explanation of the buyout methodology.
- Cancellation option of the transaction in a binary option
Providing clients an option to cancel his transaction in binary options, within a reasonable time after its execution, indicating any conditions applied in relation to the frequency of its use. The length of this option is not less than five seconds after the purchase of the binary option.
- Provision of services in relation to binary options that have investment features
Provision of services in relation to binary options that are constituted and traded in a manner similar to other derivatives and ‘traditional’ financial instruments included in the Law. Binary options with duration of 30 and 60 seconds are not considered to fall under the above.
Concluding, the regulator asks the firms in its jurisdiction to immediately review their procedures in their trading platforms and ensure that these are in line with the law also mentioning that where they consider that additional arrangements are necessary, brokers should make such arrangements immediately and not later than three months from today.
It could be argued that judging that turbo options, i.e. those expiring in less than a minute, do not constitute investment vehicles is a right one to make. Moreover, those brokers who will choose to comply with the above mentioned and offer more transparency by providing bid/offer prices to traders will definitely gain many credibility points and shake of the bad reputation of not treating their customers honestly and fairly. We will be monitoring this story closely and update all interested binary options traders as events unfold.