The binary options ban that had been anticipated for Australia now for more than 12 months has finally kicked into effect. Following substantial losses from the Australian retail market, The Australian Securities and Investments Commission (ASIC) has taken the decision to ban the issuance and distribution of Binary options to retail traders in Australia.
This has been officially announced with immediate effect and the order will be in place for 18 months, until ASIC can review the impact and make a long term decision thereafter. This ban impacts retail customers who do not have at least 2.5 million in assets to buy or trade these complex financial products.
The Australian retail market had suffered stggering net losses of up to $490 million in 2018 from binary options which then reduced dramatically to $6.7 million in 2019. This reduction was likely caused in part to a warning issued by ASIC on the instrument in April 2019 (and following on from the wider retail binary options ban in Europe.
The Massive Losses In Binary Options Market Were Falling, But The Number Impacted Staggering
It has been found that an overwhelming 80% of retail clients have lost money on trading binary options between 2017 and 2018 and that this is not a reasonable investment product for retail traders. The losses have been attributed in part to the way Binary products are set up and the ASIC commissioner Armour has come out with a statement :
“Binary options product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability”.
Binary options have been likened to gambling which is not an ideal comparison for those seeking trading products. We have found during some additional research, the following characteristics of trading Binary options to contribute towards the negativity and in support of the subsequent ban:
- The payoff structure, which features an ‘all or nothing’ result. The trader has a 50% chance of losing their entire investment amount, but with different payouts possible based on the perceived likelihood of the result.
- The duration of the contract. The average time frame for a binary options contract is just 6 minutes, but more frequently we are seeing contracts as extreme as 60 seconds. How one can expect to make a real trading decision on a 60 second timeframe is beyond the realms of most even avid retail clients.
- The negative expected returns. The payoff for some Binary options are lower than the initial trade, causing losses.
Client protection is one of the primary goals of any forex regulator and ASIC, as one of the Tier 1 regulators is pushing forward with these additional measures. After issuing a warning around Binary options in April 2019, the size of the markets have as mentioned reduced which is a positive sign. ASIC still warns retail clients against using unauthorised services in foreign jurisdictions, and hope that this ban will help protect retail traders further from unnecessary risk. Australia based traders should use one of the broker regulated locally. We have done some research on the best brokers for Australia here. This withstanding, some experts have warned that the ban could backfire tempting inexperienced retail customers into the arms of unlicensed or offshore brokers causing more harm.
ASIC aligns With ESMA across wider instruments : Retail protection again at the forefront
We can look to other regulators and jurisdictions to help answer some of those concerns. The European markets for example had banned binary options all the way back in 2018 when the retail market went through a pretty big shake up. It is within the ASIC’s interest to align with their European counterparts and ensure that the high risk Binary option products are banned in most of the worldwide markets to protect not only Australian clients, but all retail clients respectively.
ESMA (European Securities and Marketing Authority) have had these restrictions in place since 2018 and in my view, it is high time the Australian markets have caught up on these client protection directives. Find more information from ASIC directly here https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-064mr-asic-bans-the-sale-of-binary-options-to-retail-clients/