Too Risky For Me- A binary choice

A conversation I had last week set me thinking. A husky voice that I’ve been familiar with most of my life croaked away on the telephone ” I’ve been asked by a friend to tutor their son about trading, what do you think “. The owner of said voice had been involved in the markets as an equity and options salesman in the 90s for one of the great US trading houses Dean Witter Reynolds (now sadly defunct) and knows, as they say, his onions. His friend’s son had become interested as he had a seen a FX trading system showing monthly returns of 10% and was rightly suspicious and having grown up in the wholesale markets such returns are rightly treated with caution. Indeed, the maxim if it sounds too good to be true it probably is holds as good in financial markets as it does in most things in life. As the financial markets have been brought increasingly to private investors there appears to be increasing numbers of “scams” in the markets and the biggest at the moment seems to be “Binary Options”

 

For those not familiar with them a Binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all, unsurprisingly they are also known as all or nothing options. All binary options settle at either 100 or par and you either win 100 or lose everything. Although there is a theoretical underlying need for binary options in asset pricing it’s the closeness to gambling and the ease with which prices can be manipulated that are the attraction to fraudsters, many of whom are based in Cyprus and Israel. In plain English they are a gambling mechanism that can be easily altered to ensure the house wins. As the option outcome is a simple win or lose on whether a price will be above or below a set level at a set time the investor, in the loosest sense of the word, is just outright gambling. And as with all gambling not only is it addictive but the house also retains a healthy edge

 

Many of the fraudsters use either celebrity endorsement, without the celebrity’s permission, or use pressurised cold calling methods emanating from “boiler rooms” which lead sadly to dozens of stories like this which was recently published by CBCnews “A rural Manitoba couple who lost $180,000 to an online investment scam has little hope of ever seeing their money again. Now, the Manitoba Securities Commission is warning others in the hopes that no one else will fall for the scam. “The reporter continued tellingly “Professional-looking social media ads featuring the unauthorized likeness of a celebrity — were used to lure the couple into investing money in a binary options firm.

 

At long last the regulators and law enforcement authorities of some of the host countries are starting to look seriously at the problem. In the last week we have seen The Knesset passed a law banning Israel’s  “multi-billion Dollar” binary options scam however this law will still take three months to enact but after those intervening months anyone involved in the industry will be liable to imprisonment of up to two years. The FBI and The City of London police have been proactive in hunting down these fraudsters with the City Police conducting a day of action on 17th October which consisted of visiting some 20 offices in London involved in this scam. But why oh why has it taken so long to do this? Secondly how can we be sure that these fraudsters and their scam won’t reappear ? Somewhat similar to watching moles in a garden appear and disappear –whoever Moles are only a pest on your lawn and don’t threaten to take your savings.

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Having spent too many years as a broker I was one of the first to become a qualified options trader and I will add quickly the only reason I became qualified was that the exchange needed to populate the pits. Those pits were filled with traders with superior mathematical skills and in many cases sideways intellect – that’s not intended as an insult but a compliment. These traders stood with their volatility sheets making prices and I was well aware that if I wasn’t concentrating they would take my trousers down, financially that is, and I wouldn’t even realise. One of the cleverest and sharpest of these guys was Hamish Raw trader, all round good guy and author of 5 books on options and Binary options gave me this advice when I asked for his views on Binary options “Get an account with an outfit that are regulated by a credible regulator”. Simple advice but literally invaluable. In my personal view that means a broker regulated in a serious trading environment.

 

Binary options are offered through many regulated companies and platforms and in essence it is not the instrument that’s the problem but some of the brokers and regulators in particular those in Israel and Cyprus. All trading involves elements of risk which is where that great buzz emanates from but please, please make sure that the house making the odds is reputable and as I told my old friend Michael if it sounds too good to be true it almost certainly will be.

 

Mifid

Mifid – the topic that is impossible to avoid.

By Richard Matthews October 15th.

With less than 90 days to go to the implementation of Mifid II in Europe it feels that at long last people are waking up to the fact that wide ranging changes throughout the financial markets are going to happen. No arguments no more delays, when the bell rings on the first trading day of 2018 we will all enter a brave new world of regulation. Everything from the way research is disseminated, prices are quoted and foreign exchange is reported will change. To old market hands the scope and range of the changes are quite awe inspiring and at times look as if they have been designed purely for the regulator to interfere and have oversight on parts of the market that they have never been able to influence before. That’s is certainly not saying that there are areas that previously they should have looked at in more depth, such as  the obscenity which is binary options that still trundles along seemingly unencumbered by any thought to the poor people that get conned.

On January 3rd 2018 the whole of the financial services business will enter a brave new world of increased regulation and oversight from our Lords and Masters – the regulator. Already delayed by a year this tome, running to 17,000 pages and 1.5m paragraphs , that is 17 times longer than the longest book I have ever read. Cervantes classic Don Quixote weighs in at just under 1000 pages and at one point was said to contain every word in the Spanish language. Enjoying challenges and being somewhat cocksure of myself I announced to my late mother that I was going to read it I Spanish. Mothers being Mothers she only bought a copy in Spanish and thus I was cornered. I had to read it and I did. I recommend the book to anyone who wants to understand the Spanish psyche, a good read and to strengthen their wrists. Boy it’s a heavy book in more senses than one. My mother sadly is no more but even her wicked sense of humour wouldn’t have included a challenge to read all of Mifid II. There are those amongst whose job is to get to the nuts and bolts of the regulatory changes and they have been excitedly pouring over the detail of it for some time .

When you put Mifid11 into a search engine over three million results are available to you, many of which are compliance related. Now I come from an era where there was a very light, indeed too light , touch on compliance and market abuses certainly occurred. But these abuses were mostly treated internally by the market participants and a compliance officer was more often than not called to advise on a trade that had taken place not, as now, an impending trade. Is it OK to do this trade is the thought uppermost in a brokers mind these days.To me the markets are now over regulated and are only getting worse.

Some regulation seems designed to hamper the markets and ironically harm the very people, the small investor, which it was intended to protect. Transparency has always existed in the wholesale markets and if a broker tried to hide a price he would surely be found out. On many occasions a broker will have a market (in no particular instrument) of, let us say, 92-96. You can quote 92-96 till the cows wander home and not trade. The broker who closes the price to 93-95, previously flirting only with a difference but now also with the regulator, will trade. He has taken a market risk through his skill and knowledge, tightened the market and hopefully facilitated a trade by doing so. Under Mifid he will have to be imaginative in how this is executed. Would dealing tops and bottoms really help the small investor? I don’t think so as the worsening in the price will always be passed down to them.

The treatment of forward foreign exchange commitments is another area of confusion. For years a forward FX transaction in the UK  has been routinely regarded as a transaction for commercial reasons, under Mifid 11 this is no longer the case as a definite reason and end date on the forward has to be known or the transaction is seen as an investment and  falls under the FCA regulation. By taking this stance a number of brokers who acted under e money and payment directive licences are being forced to upgrade their licences and will fall under the FCA. What does this change achieve? There was the odd bad apple using deliverable FX forwards for speculative reasons, God alone knows why, without “specialist advice and oversight” but they were routinely weeded out as the executing broker knew and understood the dangers.

A lot has also been written about the restrictions on stock market analysts who, with all due respect to them, are not the most exciting of beings. But they serve a purpose to the general public and their advice trickles down into people’s pension pots and everyday lives. With the new rules on research their activities will be curtailed and not only will individual investors be harmed but also the smaller companies that they used to cover will be cut out of research as brokers become more cost conscious  as they will be unable to charge for the research. When I ran out of good excuses to avoid writing this article I started to ask contemporaries in compliance for their views on Mifid. Contemporaries  in compliance is a phrase I thought I would never utter but I find increasingly that a fair few of my old broker and trader chums are involved in the dark arts of compliance and there lies the danger. Not the danger of poacher turned gamekeeper but the danger that now traders and brokers find it harder and harder to make a living due to often over zealous regulation and its cost. Cost, now there lies the issue. How much did the faceless Mandarins earn creating Mifid 11 and all the three letter acronyms associated with it? Please no more TLAs. How much is all this regulation costing to implement? Two questions that are nigh on impossible to answer. As the costs and implications of the implementation grow ever larger, and nearer, two things about Mifid are certain. Firstly the regulators are safely behind their desks and enjoying life thanks to our generosity. Secondly and more pertinently trading volumes will initially decrease and costs will increase, the profitability of the larger participants and the very people, Joe Public, that Mifid was designed to protect will suffer as a result . What a great idea Mifid was a new regime seemingly without any cost benefit analysis, you couldn’t make it up could you? They have though, haven’t they?

Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5

This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk.

Spring forward or Fall backwards as the clock ticks toward Mif

By Richard Matthews October 13th.

With less than 90 days to go to the implementation of Mifid II in Europe it feels that at long last people are waking up to the fact that wide ranging changes throughout the financial markets are going to happen. No arguments no more delays, when the bell rings on the first trading day of 2018 we will all enter a brave new world of regulation. Everything from the way research is disseminated, prices are quoted and foreign exchange is reported will change. To old market hands the scope and range of the changes are quite awe inspiring and at times look as if they have been designed purely for the regulator to interfere and have oversight on parts of the market that they have never been able to influence before. That’s is certainly not saying that there are areas that previously they should have looked at in more depth, such as  the obscenity which is binary options that still trundles along seemingly unencumbered by any thought to the poor people that get conned. However the crucial point to me is that we have new regime without having any cost benefit analysis taking place. Now that’s a great idea isn’t it?

I was going to write purely about markets and Mifid this week as I felt that I had discussed geopolitics enough in the last couple of weeks. But it is impossible to ignore the real world. A world in which the implications and worries of Mifid pale into insignificance. A world where in recent months the battles of conflicting nation and state have been at the forefront of many at first seemingly disconnected events. In Puerto Rico a devastating hurricane has ripped through this impoverished country and one wonders whether the reaction of America would have been different and quicker if Purto Rico had been a fully-fledged state. How many years will it take this beautiful country to recover and how will it do so without billions of aid from America. Puerto Rico was bankrupt before the hurricane and now its muni bonds are next to worthless. Sometimes though, when one is touched personally by a tragedy (my mother in law is Puerto Rican) you realise that market reactions are only blips on a screen and insignificant when compared to losing a home or having to drink rancid water. The implications of this hurricane season go much further than normal and will reverberate for months if not years to come and I will return to these in a later column.

The relationship between a Nation –State and its people lie towards the root of some of the issues in the rebuilding of Puerto Rico but are clearly more evident in Spain’s relationship with its constituent Nations. The Catalan question continues and Madrid’s answer has been to clearly threaten to suspend the autonomous status of Catalonia. Regardless of the legality of the referendum that the Catalan government organised, the subsequent treatment by Spain of the Catalans is reminiscent of the Fascist years of Franco and brings back uncomfortable memories for much of the population. The sight of Fascist salutes in the streets of Spain and the far right making gains in Holland, Germany , France and Austria is of deep concern and as Europeans we really need to look deeply into our souls. Sadly though the “leaders” of Europe stand by and allow Rajoy to behave in a dictatorial manner and no attempt to reign his government in is made which is pointer to their real feelings.

Do not think this is an oversight by Europe. The treatment of Great Britain and Catalonia, all though on the face of it very different is actually quite similar. Both are being treated as if they are recalcitrant children as the Teachers in Brussels issue dictums “You will follow the mantra of federalism or we will punish you”. Shouldn’t they really be looking at these issues and acknowledging that there is a deeply seated problem with the whole idea of a federalist Europe? Further afield Iraq looks set to rush Kurdish dreams whilst in Europe Poland continues its stance against ( can I say Isamification?) immigration . All the while the arrogant idiot leaders stand aghast in Brussels.

The demands of Europe for a settlement from the UK look increasingly controlling and arrogant and it seems to me that now the UK government, rather in the way the Catalans have done to Spain, are sucking Europe in. PM May, whatever you think of her, was very conciliatory in her recent “European” speech in Florence. Predictably the hand of friendship was rejected and it now feels as if she has created a scenario where the UK is being seen to be forced to walk away with no deal and I believe this is exactly what will happen. Divorce alimony to Europe? As a trader would say, and I wish the UK would echo “Yeah lovely mate , where’s the prenup ?”

May we live in interesting times is and overused cliché but with the geopolitical events and risks that we have seen develop over the summer coupled with interest rate rises and the impending, none too premature, ending of the crack cocaine of the markets QE we are in for an interesting Autumn and Winter which hopefully the implementation of Mifid won’t slow down too much. Oil, Gold, Commodities let alone indices and currencies have all been, and are still , affected by the events that I have mentioned but the real losers are the poor people and please lets pause and remember them .

What do Puerto Rico , Catalonia and Brexit have in common?

Spring forward or Fall backwards as the clock ticks toward Mifid

By Richard Matthews

With less than 90 days to go to the implementation of Mifid II in Europe it feels that at long last people are waking up to the fact that wide ranging changes throughout the financial markets are going to happen. No arguments no more delays, when the bell rings on the first trading day of 2018 we will all enter a brave new world of regulation. Everything from the way research is disseminated, prices are quoted and foreign exchange is reported will change. To old market hands the scope and range of the changes are quite awe inspiring and at times look as if they have been designed purely for the regulator to interfere and have oversight on parts of the market that they have never been able to influence before. That’s is certainly not saying that there are areas that previously they should have looked at in more depth, such as  the obscenity which is binary options that still trundles along seemingly unencumbered by any thought to the poor people that get conned. However the crucial point to me is that we have new regime without having any cost benefit analysis taking place. Now that’s a great idea isn’t it?

I was going to write purely about markets and Mifid this week as I felt that I had discussed geopolitics enough in the last couple of weeks. But it is impossible to ignore the real world. A world in which the implications and worries of Mifid pale into insignificance. A world where in recent months the battles of conflicting nation and state have been at the forefront of many at first seemingly disconnected events. In Puerto Rico a devastating hurricane has ripped through this impoverished country and one wonders whether the reaction of America would have been different and quicker if Purto Rico had been a fully-fledged state. How many years will it take this beautiful country to recover and how will it do so without billions of aid from America. Puerto Rico was bankrupt before the hurricane and now its muni bonds are next to worthless. Sometimes though, when one is touched personally by a tragedy (my mother in law is Puerto Rican) you realise that market reactions are only blips on a screen and insignificant when compared to losing a home or having to drink rancid water. The implications of this hurricane season go much further than normal and will reverberate for months if not years to come and I will return to these in a later column.

The relationship between a Nation –State and its people lie towards the root of some of the issues in the rebuilding of Puerto Rico but are clearly more evident in Spain’s relationship with its constituent Nations. The Catalan question continues and Madrid’s answer has been to clearly threaten to suspend the autonomous status of Catalonia. Regardless of the legality of the referendum that the Catalan government organised, the subsequent treatment by Spain of the Catalans is reminiscent of the Fascist years of Franco and brings back uncomfortable memories for much of the population. The sight of Fascist salutes in the streets of Spain and the far right making gains in Holland, Germany , France and Austria is of deep concern and as Europeans we really need to look deeply into our souls. Sadly though the “leaders” of Europe stand by and allow Rajoy to behave in a dictatorial manner and no attempt to reign his government in is made which is pointer to their real feelings.

Do not think this is an oversight by Europe. The treatment of Great Britain and Catalonia, all though on the face of it very different is actually quite similar. Both are being treated as if they are recalcitrant children as the Teachers in Brussels issue dictums “You will follow the mantra of federalism or we will punish you”. Shouldn’t they really be looking at these issues and acknowledging that there is a deeply seated problem with the whole idea of a federalist Europe? Further afield Iraq looks set to rush Kurdish dreams whilst in Europe Poland continues its stance against ( can I say Isamification?) immigration . All the while the arrogant idiot leaders stand aghast in Brussels.

The demands of Europe for a settlement from the UK look increasingly controlling and arrogant and it seems to me that now the UK government, rather in the way the Catalans have done to Spain, are sucking Europe in. PM May, whatever you think of her, was very conciliatory in her recent “European” speech in Florence. Predictably the hand of friendship was rejected and it now feels as if she has created a scenario where the UK is being seen to be forced to walk away with no deal and I believe this is exactly what will happen. Divorce alimony to Europe? As a trader would say, and I wish the UK would echo “Yeah lovely mate , where’s the prenup ?”

May we live in interesting times is and overused cliché but with the geopolitical events and risks that we have seen develop over the summer coupled with interest rate rises and the impending, none too premature, ending of the crack cocaine of the markets QE we are in for an interesting Autumn and Winter which hopefully the implementation of Mifid won’t slow down too much. Oil, Gold, Commodities let alone indices and currencies have all been, and are still , affected by the events that I have mentioned but the real losers are the poor people and please lets pause and remember them .

Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5

This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk.