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.

 

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