Is there such a thing as forex fraud with a binary options broker?

Chris Lee

No matter where you read about investments these days, the hottest new area to hit the scene in recent years has been the field of binary options. Also known as digital or all-or-nothing options, this new genre is exciting and captivating due to the possibility of large payoffs in as brief a time as sixty seconds in some instances. The simplicity of the process is another big draw, since execution orders are easy to make, while this trading process sweeps away many of the technical expertise requirements or risk and money management issues that plague traditional asset trading.

Forex brokers are quick to admit that the binary option space is growing at multiples of their own fast pace, but none of these brokers appear to be crossing over into the digital space with any regularity. On the other hand, not a week goes by that there is not some new binary option broker entering the fray and enticing customers to switch with their new promotions or enhanced service features. The race is on, and only the quickest will survive, or at least that is the impression that one gets when checking the pulse of this provocative new financial service.

Does the present situation make it susceptible to fraudsters?

In many respects, the prevailing status of the binary options industry is very similar to the early days of retail forex trading, from the mid-nineties, right on through the next decade. Customers are thronging in mass to this new service. Growth is off the charts. New brokers quickly appear to address the overheated demand. Although simplified, trading currency pairs, along with CFDs for commodities, stocks, and indices for profit, is still a complex art. Newcomers liked the thrill of quick and large payoffs, along with the need for some level of technical expertise being absent.

The stars are definitely aligned to suit a con man’s dream, but with one major difference. There is at least some semblance of regulatory infrastructure present, although lame in some jurisdictions, to ward off criminal intent. Such was not the case with retail forex trading at its start. The “Wild West” atmosphere almost encouraged the criminals to strap on their six guns and go all in, so to speak. The presence of a more informed body of law enforcement and regulatory officials has actually benefited this new, burgeoning, and modern form of gambling.

The wholesale stealing of client deposits, as was experienced when retail forex trading was young, has not been witnessed to any large degree with binary option brokers. This fact does not mean that you can relax or have a false sense of security. The potential for fraud comes in many flavors: location, poor business practices, and lack of transparency. If you want to play this game, you will more than likely have to choose a broker in a foreign country, a situation always rife with potential fraud issues. The crisis in Cyprus in 2013 highlighted how poor business practices can spoil your fun, and pricing transparency is lacking, as far as consistency of service and payout ratios.

How could these three fraud areas impact my account balance?

Fraud may not be as openly prevalent in the binary option arena, but consumers should still be skeptical and aware of where fraud or inordinate risk may lurk.

  • Foreign Location: Binary option brokers are primarily located in exotic offshore locations where casino gambling is big business. Their back offices require professionals in this field, the reason why traditional retail forex brokers do not offer these services today. Regulation is barely existent, if at all, and, if you need to secure your rights in a foreign jurisdiction, then prepare yourself for an endless exercise in futility;
  • Poor Business Practices: Poor withdrawal delivery is common. Time is money in this field, meaning that brokers want to keep you in the game by appealing to your greed. Regulation tends to fall under local gambling commissions, which are more interested in maintaining a healthy flow of tax revenue to government coffers. The crisis in Cyprus also revealed that many local brokers did not segregate customer deposits offshore in Tier-1 bank accounts, far from seizure when local banks failed. The lack of adequate capitalization, management bios, and information related to profitable and losing trades has yet to be addressed by the industry, as well;
  • Pricing Transparency: Binary option websites are cloaked in the mystique of trading and investing, but neither is the case. You are not buying any securities. You are literally betting on the direction in the real marketplace that an asset might take, as of a specific expiry period. A value from Reuters is the final judge when it comes to winning or losing. This form of gambling has been compared to pari-mutuel betting at a racetrack. The House uses complex computer-driven algorithms to adjust odds on the fly, as more bettors place their bets. Brokers do market high payoffs, but, if they averaged a net 85%, then you would have to win 54% of the time to break even. Poorer payoff averages benefit the House in a big way.

Can fraud exist within the realm of binary options?

Of course it can, but you have to be wary of a new set of parameters that are moderately different than those found in the retail forex industry. Each trading genre has its own peculiarities, and risk thrives where complexity and confusion reign. Barring the financial crisis in Cyprus in 2013, there have not been any broad scale cries of foul in the binary options space to date. Yes, there have been complaints about poor withdrawal delivery performance, but blatant fraud has not been present, as far as the press is concerned.

The lack of blatant fraud, however, does not equate to the lack of risk. Trading in binary options is not really trading or investing. It is pure gambling, and, as everyone knows, the House always wins in any form of organized gambling. Back office algorithms manipulate payoff ratios to ensure that the House profits and that the local taxman gets his due. There is only one place where this largesse can come from – the unsuspecting customer, or gambler incarnate, that is willing to pay his money over for a quick thrill and a shallow hope. Under such circumstances, the need for a complex fraud strategy to defraud customers is non-existent. The system is already set up legally to achieve that objective, helped along by slick marketing promotions and promises of easy wealth.

Concluding Remarks

In the end, be cautious. Keep your greed in check. Exercise due diligence, both before and after, you choose your binary option broker. Be wary of bonus promotions, and follow a strategy that shifts the odds in your favor by testing it on a demo system. You are your first and last line of defense when it comes to fraud and risk prevention!

Chris Lee

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