Australia renews retail ban on binary options for ten more years

Since the ban on binary options offers targeting retail investors came into force, 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 the ban on binary options until October 1, 2031, thus ending any doubt that the regulator would reconsider its position on the matter ten years later.

Binary options are OTC derivatives that allow clients to speculate on the occurrence or non-occurrence of a specific event within a defined time frame. This may 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 on May 3, 2021 that the Commodity Intervention Order came into force that prohibits the issuance and distribution of binary options to retail clients.

The decision succeeded in preventing retail clients from losing money trading binary options in Australia, the financial regulator said, adding that the extension of the ban will ensure protections remain in line with those in place in comparable markets abroad.

ASIC VP Karen Chester said: “Binary options are high-risk, harmful financial products that resulted in millions of dollars in losses for retail investors prior to our ban. Extending our binary options ban until 2031 ensures that this important protection for retail investors will continue.”

Using data from five licensed binary options issuers, ASIC published a report summarizing the impact of the order filed in May 2021. In the previous 13 months, ASIC found that retail clients incurred significant aggregate net losses when trading options. binary:

  • 74-77% of active retail clients lost money trading binary options
  • retail client accounts had net losses of $14 million in total
  • loss-making retail client accounts generated net losses totaling $15.7 million, while profit-making retail client accounts only netted a profit of $1.7 million.

The ban has been effective in reducing the risk of significant harm to retail clients as a result of binary options, according to the regulator, who reminds the industry that retail clients have not made any losses (or profits) when trading binary options with authorized issuers since the product intervention order came into force.

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 when trading binary options. In addition, this product is likely to create cumulative losses for retail customers over time due to the following product features:

  • an ‘all or nothing’ payout structure, where one of two possible outcomes for a binary option contract is for the retail client to lose their entire investment
  • short contract length (for example, the average binary options contract length traded with a provider was less than six minutes)
    Negative expected returns (ie the present value of the expected payout for a binary options contract is less than the initial investment).

ASIC’s actions to address binary options concerns have included enforcement actions to address misconduct, public warning notices and other statements, draft surveillance and issue reviews, stricter regulations, and extensive education campaigns for retail clients and guidance for binary option writers.

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