New ASIC Ban Targets Binary Options
Posted by Colin Lambert. Last updated: April 1, 2021
Just days after reducing the leverage available to retail clients using CFDs the Australian Securities and Investments Commission (ASIC) has banned the sale of binary options to the same group.
In a Product Intervention, which will take effect from 3 May 2021, ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients.
ASIC reviews in 2017 and 2019 found that approximately 80% of retail clients lost money trading binary options. It also found that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics, namely the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount; the short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and the negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).
To put that data into hard numbers ASIC says it estimates that retail clients lost around $490 million on binary options in 2018 alone.
The size of the market in Australia has since reduced significantly after ASIC issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions. Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.
The new ban brings Australian requirements into line with prohibitions in force in comparable markets. It will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.
ASIC commissioner Cathie Armour says “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.”