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U.S. Regulators target foreign digital options brokers for fraud and risk

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In what appears to be an all-out coordinated attack on the digital options industry, U.S. regulators have flooded the airways with fraud advisories, warning consumers to be extremely wary of any digital options brokers that solicit U.S.-domiciled clients. This three-pronged attack came from the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA).

What are we to infer from an all out, full-court press of this nature? Typically, this type of response only occurs after these agencies have been inundated by complaints from angry investors or have grown weary over prosecuting the same type of felony over and over again. These complaints and arrests often bear signs of similar tales of woe, as noted specifically in this recent FINRA press release:

“Through its recently launched FINRA Securities Helpline for Seniors – HELPS™, FINRA has received a number of calls that suggest that scams involving binary options and their trading platforms abound. Callers report situations in which firms claiming to be binary options trading firms do not deposit investor funds into the investor’s account, deny requests to return funds, or require a fee be paid in order to receive a return of their investment assets.”

Within the FINRA release, the agency also provided links to the CFTC and the SEC for investors to be informed that they are not alone in this quest to block non-U.S. digital options brokers from preying on unsuspecting Americans. These two other agencies have been carrying on the fight since 2013, but the addition of FINRA now completes the triumvirate, of sorts, a concerted and coordinated attempt to protect U.S. citizens from fraud and high risk emanating from off shore.

Why are U.S. regulators making such a fuss about foreign digital options brokers?

The Dodd-Frank Act and its subsequent regulations were designed to cure many perceived ills in the securities and investment arena. In the world of foreign exchange, the powers of the CFTC were broadened, which resulted in a wave of new compliance and reporting requirements, reduced standards regarding the use of leverage in forex trading, and stiffer rules pertaining to the levels of capital that brokers must maintain.

There also appeared to be a concerted effort to assist IRS officials in their struggle to ensure that U.S. citizens only used regulated entities that complied with annual tax reporting requirements. Without this basic reporting, foreign-based forex brokers were actually aiding and abetting tax evasion on a global scale. Whether there was a direct causal relationship between client and broker to defraud the U.S. Government of tax revenues is open for debate, but without reporting, there was no audit trail for IRS auditors to ferret out undeclared income from activities offshore.

Ostensibly, however, there were many other reasons that regulators were tightening the screws on the brokerage industry. After spending nearly two decades educating consumers as to the risks involved in forex trading, the CFTC, along with its other regulatory partners, had successfully cleaned up the industry from a fraud perspective, except for one crucial area. Domestic regulators had very little influence or jurisdiction in closing down foreign-based operations that were deemed fraudulent.

As a consequence, regulators across the globe must resort to producing consumer alerts and blacklists that warn the public of potential hazards. Information sharing does help, as does cooperative effort, but today’s criminals are much more sophisticated in their various approaches and tend to keep one step ahead of law enforcement. Within this context, it is easy to see that gullible and uninformed investors might easily fall prey to the siren call that Internet fraudsters project across the worldwide web.

What types of fraud prevail in the world of digital/binary options?

The tone employed by regulators would almost suggest that everyone in the digital option space is a crook, keen on separating you from your hard-earned money. The fact of the matter is that the vast majority of brokers in this new age arena are legitimate. They do obey the law, want the best trading experience for their customers, and have invested heavily in technology, back-office operations, and marketing. New brokers appear on the scene monthly because this industry is still the hottest thing going in forex, and demand from consumers has created a high level of competition, as well.

Unfortunately, the overwhelming flow of new customers into a decidedly complex area of financial investment has also grabbed the attention of the criminal element in our society. Customers are drawn to digital options because they promise immediate and hefty rewards with very little effort. When greed and the desire to get rich quick are prevailing factors used to attract new clients, then fraudsters almost have a “perfect storm” type of situation that is literally too good to be true. The only effort required is to dust off an old scheme and adapt it to the electronic age.

FINRA, which has oversight responsibility for nearly 650,000 registered brokers, and the other regulatory bodies listed a number of red flags that should come as no shock for readers of our articles. These included the following:

1)     The broker never records your initial deposit, claiming there must be a mistake with your bank or transfer agent;

2)     When you do have gains, these are not posted to your account, as if they mysteriously disappeared or never happened;

3)     Trading platform software is manipulated in such a way that losses are the result, by adjusting expiration periods or market valuations at expiry;

4)     Withdrawal requests are ignored, you are told that delays are required for processing your request, or you are to be assessed large fees for the return of your account monies;

5)     You are pressured by employees of the broker to send more funds.

There are even instances where crooks have impersonated a regulator and tried to extract huge fines, claiming the customer has broken international law by dealing with the broker in question. Others have acted as recovery agents that, for a large fee, they will work diligently in the foreign jurisdiction to reclaim your funds. Lastly, the agencies warn of potential identity theft. They advise that you never give out the requested information, but this advice is in direct opposition to internationally mandated AML legislation to prevent money laundering. Brokers that deal across a boder are required to request this information and keep it timely. The regulators are basically telling you to never deal with an offshore entity.

Then there is the issue of being registered and dealing in the distribution of securities that do not meet the litmus tests of the regulators. Per the CFTC, “There currently are only three designated contract markets offering binary options in the U.S.: Cantor Exchange LP; Chicago Mercantile Exchange, Inc.; and the North American Derivatives Exchange, Inc.  All other entities offering binary options that are commodity options transactions are doing so illegally.”

From a registration perspective, FINRA is adamant: “If you purchase binary options offered by persons or entities that are not registered with or subject to the oversight of a U.S. regulator, you may not have ‘the full benefit of the safeguards of the federal securities and commodities laws that have been put in place to protect investors, as some safeguards and remedies are available only in the context of registered offerings’.”

Why do regulators consider binary options as a much higher risk?

Protecting against fraud is one concern, but regulators feel it their duty to warn the public if the latest online investment genre has odds that are severely stacked against them. From their perspective, foreign-based binary option dealers are neither registered nor dealing in registered securities. It is pure gambling, not investing. If you accept the picture that they portray, then you would be misled into believing that all digital option brokers are thieves and con artists. Such is not the case, but the odds do vary greatly from broker to broker. The field has gotten more competitive, but not all are the same.

For traditional forex trading, one must accumulate a winning dollar percentage ratio of 55/45, in order to break even after covering brokerage fees and commissions. Binary options simplify the entire process, but you still need to have at least a payoff ratio of 75% and a rebate figure of 10% to match similar odds, and something better still to be a consistent winner over time. Many binary option brokers boast of high payoffs in the 85% range, but these may be rarely offered on individual asset choices. Their average payoff may be much lower. On a 65% payoff, you would have to guess right more than 60% of the time just to break even. They are the “House”, and the House always wins.

Trying your hand at digital options is also no different than betting on a horse at a racetrack. Yes, some will win, but mostly there are losers that contribute the money into the pot. The House will always win after taking their cut out of the pot. In other words, the proposition is a negative-sum game at best. It is a little harder than it sounds, and a broker in this space can get in financial trouble if he does not manage his risks effectively in his back office.

If you have a proven strategy based on technical and pattern analysis, then you might be able to tilt the odds in your favor. The hard stop of a pre-determined expiration time, however, is one more twist that is difficult to predict, another reason why predicting binary option outcomes is so difficult.

Concluding Remarks

Trading binary options can be fun. You can win big quickly with very little effort, but make not mistake about it – this genre is all about gambling. The thrill of the win does tap into the addictive centers of our brains, another reason to be cautious when approaching this exciting field of endeavor. Trading for consistent gains over time is a possibility, but it takes a disciplined process and adherence to a step-by-step plan that has been tested over many hours on free demo programs.

Regulators in the U.S., however, are not impressed, nor do they feel any obligation to present the field of digital options in a fair and unbiased light. They receive far too many complaints and see far too many instances of outright fraud to believe otherwise. Their message is simple – Beware of foreign-based brokers where you will never be able to enforce your legal rights. Always remember, you are your first and last line of defense, when it comes to protecting yourself from the con man.