Binary options trading is the latest financial scam. Years ago there was a boom in trading financial and commodity futures. Essentially these were bets on whether the value of a currency or commodity would go up or down at some time in the future. Options were normally held for 7 days and were traded in many different markets. US dollars, euros for currencies, and commodities could include oil and gas, wheat, orange juice – even pork bellies.
These markets had been running for many years, and are used mainly by commercial producers and buyers to guarantee the value of a crop or the cost of raw materials for future production. Airlines for instance invest heavily in oil futures because fuel accounts for such a high proportion of their running costs.
You don’t have to be a big producer or supplier to buy futures, because they are normally traded in $1,000 blocks. So in those heady days of financial optimism some traders started to sell the idea of futures trading to small investors. The sales pitch was that you could buy a future for 10% of the value of the underlying commodity. So if you wanted to buy a future for £10,000 of North Sea oil, you would have to invest only £1,000. If the price went up your profit would be the price movement of a £10,000 investment, so the return on your money could be quite high. On the other hand, if the price went down you could expect to lose the lot. The traders made their money from fees for arranging the transaction and other commissions.
Not surprisingly the brokers talked up their own expertise heavily and claimed to have teams of highly trained “analysts” who had their own special insights and were constantly pouring over their charts to find the next sure-fire winner for their clients. In many cases these teams never existed. The brokers were little more than heavily incentivised telesales operators who were trained, if anything, to extract the maximum amount of cash from their clients. “Burn and churn” was the order of the day. Eventually the whole thing degenerated into an outright scam, the regulators stepped in and many of the retail brokers closed down and dispersed to avoid the inevitable litigation that followed on. Not before many investors had lost in some cases all their lifetime savings.
You would have thought that after this experience retail futures trading would be dead and buried.
So I was really surprised to see retail futures trading re-emerging. Of course the product has been simplified and updated for our digital age, It now goes under the name of binary options trading but effectively it’s the same deal. It’s called binary because you either win or lose. No longer does your future have a life of 7 days or more. This is fast trading so the option can expire in hours.
Binary options trading is promoted aggressively through the internet and social media. The pitch is to provide case stories of mostly young people who live a lifestyle of unimaginable luxury funded by their earnings from binary options. What they fail to mention is that these people have not made their money from trading binary options, but from commissions earned from new clients they have brought into the scheme. It is the ultimate pyramid marketing structure, without even a tangible product.
The Sunday Times ran a feature on one such “trader”, the 22 year old Elijah Oyefeso, who claims a monthly £80,000 income from trading binary options.
The reality, which was exposed much earlier last year in USA based trader forums, is that Mr Oyefeso makes his money from promoting the services of the brokerage he is affiliated to. While he may enjoy the benefits of a huge income, his lifestyle is at the cost of the trading platform “clients”, many of whom have lost very considerable sums of money.
So, what is the reality behind binary options? And if it is a scam how have they got away with it for so long?
The structure behind each scheme is spread across a number of organisations, often operating in different territories. In Israel they are known as “The Wolves of Tel Aviv”, and they operate through companies based in Bulgaria, Panama, Cyprus – anywhere regulations are lax. This complexity is designed to avoid the authorities and legal sanctions. A City of London police spokesman called binary trading “the latest and fastest growing iteration of investment fraud”.
Average losses are over £20,000. One victim committed suicide after losing his house, his pension and his savings. These markets are developing fast, and show signs of becoming increasingly sophisticated. There is every sign that current business practices would lead to long prison sentences if operators ever came within the remit of American securities regulators – but they are all run offshore. These scams are promoted through the internet and backed up with impressive looking websites.
So, if you have decided to draw down some of your pension pot, and are considering binary options trading as an attractive investment proposition, think again. It is probably the fastest way yet devised to separate you from your savings.
The Financial Conduct Authority’s take on Binary Options
The FBI’s March 2017 update on Binary Options fraud