Binary options have been controversial for years. If you are a trader in the USA, you are probably most aware of this, since the CFTC has essentially placed a ban on binary options trading (with a few exceptions—the prime one being Nadex). Technically trading binary options in the USA is not illegal, but you can only do so under special circumstances.
Specifically, the CFTC has stated:
“It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt.”
- Anyway, none of this should be news to you if you have been trading binary options for years, whether you are in the USA or abroad. But if that is the case, you also probably are aware on some level that regulations have been tightening not just in the USA, but also abroad.
- More and more brokers have been seeking CySEC regulation abroad. CySEC regulation is the easiest financial regulation to qualify for because it is the loosest. It provides a level of regulatory oversight, but it is not as strict as CFTC regulation. Unfortunately, CySEC prohibits USA traders from dealing with their brokers.
- Countries in Europe and the Middle East have started issuing warnings to their citizens against binary options trading. In fact, binary options scammers are quite aggressive in some countries such as Israel, where if you advertise you are looking for a job, you will get phone calls on a daily basis asking you to work at binary options call centers. Most recently in September, Denmark issued an official warning against trading binary options. The Netherlands is working on banning advertising for binary options trading outright.
- Recently I saw a story (which I cannot confirm) that Visa has sent statements to card issuers, acquirers, and processors warning them of binary options scams. Apparently, Visa has said in essence that it plans to seek punitive action against binary options providers which are unregistered (this does not apply to Nadex, since Nadex is registered with the CFTC).
If this seems to paint a pretty grim picture, that is because it does. As someone who is inside the binary options industry, I find it frustrating in more ways than I can count.
Why Do Binary Options Brokers Have Such a Shabby Reputation?
The situation with binary options is a complicated one. It is way too easy to say, “Binary options is a scam!” and leave it at that. But that is simply not the case.
The problem is that the overwhelming majority of binary options companies are scams, and they do indeed prey upon the desperate.
Basically, this industry has earned its bad reputation overall, but this does not mean that individual companies deserve that poor repute.
Here are some of the major problems that plague the industry:
- Outright fraud. A lot of binary options brokers have literally rigged the game against their customers. They make steady profits because they are only offering options which customers are likely to lose. Even if the customer technically should win a given trade, they may continue running the clock until the trade expires at a loss. They then say, “We are not responsible for technical failures on our site,” and steal the money.
- Impossible withdrawals. This also falls under the category of “blatant fraud.” A customer decides they want to get out of binary options, so they try to withdraw their funds. The company calls them and harasses them to stay. If they still refuse, the company then accuses them of “possible fraud” and freezes their funds indefinitely.
- Even regulated companies may behave in a shady way. As I mentioned before, CySEC regulation provides some regulatory oversight, but it is pretty loose, which is why it is easy to qualify for. Even though companies which conform to CySEC regulations are probably not actual scammers in a lot of cases, they may still engage in questionable business practices.
- Some binary options brokers lie about the experience of their personnel. They may direct their “account managers” to make up false biographies and resumes listing experience in trading they do not possess.
- Most binary options brokers are dishonest about the product they are selling. They target customers who have a “gambling” mindset, but they do not call binary options trading “gambling.” They call it “investing,” convincing these gamblers they are doing something responsible by trading.
If I sound like I am being harsh, it is because I am. Brokers that follow the dubious practices above deserve the terrible reputation they have earned.
But what makes me really upset is that this reputation has been generalized to all binary options brokers.
Binary Options Prop Up the Economy in Tel Aviv
As I mentioned before, this is a complicated issue. If you want to know just how complicated it is, consider the city of Tel Aviv, where binary options has become such a huge source of income in the economy that it would suffer a major collapse if the industry were shut down entirely. We are talking about thousands of jobs lost.
This should make a point. Yes, shady binary options brokers have destroyed lives—but binary options as an industry has also salvaged lives, providing incomes to people who have no other way to take care of their families.
Now, I am not making excuses for what goes on in Tel Aviv, where numerous scammers reside, stealing money from their customers. On the contrary, companies like these are why the entire industry is facing increasing regulatory struggles—including in Israel.
I am simply saying that like it or not, an entire city is now heavily invested in the binary industry because it is such a big part of the job economy. Regulating the industry out of existence is not the answer.
What we need is regulation which supports the best in the industry.
Not All Binary Options Companies Are Scammers
Binary options is an industry where 90% of the companies are ruining the game for the remaining 10%. Those are not exact figures, of course—that is just a guess. But consider that there are hundreds of binary options brokers in existence. That means there are probably dozens of legitimate companies.
Those companies and their employees do not deserve to suffer because of the other 90%.
I read a disparaging comment in an article today which mentioned how if customers in the USA and around the world try to look up the legality or safety of trading binary options, most of the top results in Google are affiliate sites.
Affiliate marketing is one of the oldest and most common (and effective) forms of advertising. This does not mean that every affiliate is inherently without a conscience. Yes, if an affiliate pushes a certain binary options provider, of course they have a vested interest.
But they have a choice about which sites to promote.
I for one wish that regulatory information direct from regulators were more comprehensive, written in plain language, and much easier to find. That said, we are a binary options affiliate, and we are quite frank about the fact that 90% of binary options sites should be avoided like the plague. We are focused on partnering with sites which are going to stand the test of time—and ultimately regulation—because they are offering quality services to traders.
We are constantly updating our lists based on new information as it emerges. If we find out that a certain company has gone south, we remove them. If another site is purchased by a new company and takes a turn for the better, we check them out again. Our recommended brokers list is a vetted work in progress.
In short, we care about this industry. We want good companies to thrive as well as dedicated traders. That includes those who are in the market for profits and those who are here to gamble and are honest with themselves about it.
This Is Why We Recommend Nadex
Have you noticed how most of our recent articles have focused almost exclusively on promoting Nadex? That is because we can recommend Nadex without reservations. This is a CFTC-regulated binary options website which operates as a genuine exchange. That means that the person taking the opposite end of your trades is another trader, not Nadex. Nadex has no vested interest in you losing money. Nadex simply takes its money in the form of commissions (which are quite reasonable).
Seriously, if you have any doubts about joining another binary options broker, just sign up for Nadex. The CFTC is as strict as any regulatory agency possibly can be, and they will protect your best interests.
And yes … I am telling you this as a Nadex affiliate. I am fine wearing that on my sleeve. This industry needs more transparency, so let this site be the first to own it. If you do not want to take my word for it that Nadex is a safe, high-quality trading site, then just ask the CFTC.
Want more reasons to consider Nadex? Check out how Nadex can revolutionize the way you trade.
I particularly recommend Nadex if you are serious about making money (an actual investor). But you know what? If you are a gambler and you are here to have fun, I still recommend Nadex first and foremost. If you do happen to win some money, at least you know you will be able to withdraw it.
That reminds me … I have seen a lot of people saying that Nadex only accepts traders from the USA. This is not true. Nadex long ago added numerous other countries. Here is the full list they currently accept:
Australia, Austria, Belgium, Brazil, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Republic of Korea, Liechtenstein, Luxembourg, Malaysia, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States.
Suggestions to the Binary Options Industry
I mentioned earlier that regulating this industry into the ground is not an answer. Doing so will destroy jobs and livelihoods both for traders and for binary options brokers and their employees. So what do I suggest?
1. Knock off the illegal practices.
To the rotten binary options brokers out there, I want to say this—quit with the scamming. You know who you are. You may be lining your pockets, but you are doing so at the detriment of the very industry that you belong to. The longer that goes on, the more we are going to see regulators, credit card processors, and others cracking down on binary options. Regulation is good, but the less we need, the better.
The reality is, the days are numbered for companies like these. Sooner or later, people catch on, and bad companies earn the bad reputations they deserve. If you are a broker and you want to make a killing in this industry, play by the rules. It may take you longer to build up a thriving business, but yours will last. Both regulators and customers will be thankful you exist.
2. Quit looking for loopholes.
Next I want to address those companies that are not outright “scammers,” but still are searching for loopholes or advertising dishonestly.
Just provide a fair, high-quality service. Seriously, switch to a commission system if you need to. Be like Nadex and keep it affordable. This will not close doors on customers, but it will enable you to make a profit while offering fair trading.
And the reality is, even on a quality trading site, something like 90% of customers will be losing money anyway, because most traders simply do not have the professional chops to succeed. My point here is … even if you decide not to operate as an exchange, you should make a lot of money off of these customers no matter what you do. So support the 10% that really, really want to make it, and be fair with the rest.
3. Get with it, CySEC.
I am not an expert on CySEC, but I have read time and again that this regulatory agency is not really doing its job. Customers apparently submit fraud complaints and do not get their money back. I am not sure if CySEC is just really slow in addressing these complaints or if they are just not interested, but it has gotten to the point where “regulated by CySEC” does not seem to mean a whole lot to people.
CySEC is in a position to get this industry working in the right direction. So may brokers are already partnering with them, and they could go the extra mile and really start cleaning up the industry. I hope that they do.
4. Be honest about the fact that binary options is gambling for most companies and most traders. Get rid of the stigma against gambling.
Finally, here is one more suggestion to the industry as a whole—get honest about the fact that this industry exists in a gray area between investing and gambling.
I do not really understand why there is such a strong moral stigma surrounding gambling. In the USA of course it is particularly strong, but you can encounter it all around the world. This stigma does not actually stop gambling. All it does is make it even harder for people to gamble responsibly.
Gambling is not a problem. Addictive behavior is. Gambling within reasonable bounds is a form of entertainment. Addiction drains bank balances.
Addictive behavior spawns in large part from dishonesty—and that all starts when people insist that something is not gambling when it is.
Binary options trading—and other forms of trading—are not necessarily gambling by default. But binary options does tend to lean that way. Binary options trading is ridiculously easy to learn how to do. With just the click of a button, you can put yourself in a “win or lose” gamble on the price of a financial asset. It is easy to see how this plays like a game.
While you can use this as a serious investment tool, 90% of traders never will, whether they say they want to or not. Gambling has more mass appeal than serious investing. So I completely understand why binary options is essentially a gambling product for most people.
Why can’t we leave the stigma behind and just admit it? If brokers were honest about the fact that what they are selling is a gambling product, they could be straightforward with their customers and encourage them to take a responsible approach to trading. Binary options trading could be regulated as (mostly) gambling instead of condemned as a dishonest market.
Just remember, two things determine whether something is a gambling product:
1-The product itself.
2-How the product is used.
The city of Las Vegas has a strong economy based around gambling. A very small minority of players at the blackjack or poker tables do play profitably and seriously for a living; most do not—they simply gamble and rely on luck. Nobody in Vegas lies about the fact that the vast majority are gambling for fun and ultimately losing money. Why can’t Tel Aviv build something similar out of its binary options industry?
Suggestions to Traders
Finally, I want to give two tips to binary options traders. You already know that you need to be extremely selective about the broker you choose to register with if you want to stay safe, and you already know that I primarily advise Nadex. But there are a couple of changes you can make to your mindset which will help you stay safe.
1. Stop buying into the “overnight millionaire” myth.
If you visit the Nadex website, you will not see all kinds of wild claims that you are going to get rich overnight swimming next to your yacht while a trading robot does all the hard work for you.
You will see that kind of language on a lot of other binary options websites—especially the really dubious ones.
Call center workers for binary options scams report that they especially seek to target customers who have a fantastic belief that getting rich is easy. Basically, these are the same types of customers who play keno or the lottery or slot machines with the genuine desperate belief that they have a shot at a jackpot.
It gets worse with trading though because of that whole let’s-lie-about-gambling aspect. Many traders not only fit that psychological profile, but believe they do not! Why? Because they are too smart to blow money on keno. They are going to invest it instead.
Sorry, but it does not work that way. Getting rich is neither a quick nor easy process. It does involve an element of luck, but it also involves a lot of hard work if you are going to do it legitimately through trading.
Any company that denies that is probably not a business you should be dealing with. And if you deny that reality, you are going to blow your money one way or another. Even if you pick a great company like Nadex, you will throw your bankroll away with poor trading decisions. When you do not get rich overnight, you will give up and quit. You will then tell everyone, “Trading is a scam.”
Nope. The scam is believing you can get rich quick. So please do not scam yourself. A lot of traders do go through this phase of naiveté. Those who get past it sometimes go on to become successful traders—after a lot of hard work.
2. Get honest about whether you are a serious trader or a gambler.
Circling back to the whole gambling issue, I mentioned before I wish the industry would stop condemning gambling and get honest about the fact most binary options trading is gambling.
As a trader, you need to get honest about gambling too.
This is something I say on a regular basis, but so few websites devoted to binary options talk about it, which is why I feel the need to emphasize it repeatedly:
Traders exist along a spectrum. At one end are hardcore gamblers. At the other end are hardcore investors.
Serious investors are trading to make serious money, with the hopes (in many cases) of doing so full-time. Those who do succeed get past the naïve belief that they can “get rich quick.” These investors need to be most selective with the sites they choose to trade on. Serious investors have trading methods they test and refine on a continuing basis, which is very hard work.
As to gamblers … people gamble for all sorts of reasons. Smart gamblers are honest with themselves about what they are doing. They acknowledge that the main reason to gamble is to have a good time. They play with money they can afford to lose, and view it as a controlled entertainment expense. If they win, they are grateful for their luck, but they do not lose sight of the fact they are relying on it. They do not feel ashamed of the fact that they gamble, because they are doing so responsibly.
Foolish gamblers usually do not know they are gambling at all—either because they genuinely are naïve (the “get rich quick” folks) or because they are lying to themselves. Social shame can lead to this kind of dishonesty, which is why I urge the global culture to accept that gambling is a reality and does not have to be unhealthy. Let’s try to get more gamblers into the “smart” category and away from the “foolish” category.
If you are a trader, my advice to you is to examine your motivations. No matter what they are, getting honest will allow you to start trading responsibly. There is nothing wrong with being a gambler so long as you do not gamble outside your means.
Conclusion: Expect Continuing Changes in the Industry
I want to wrap this up by saying that consequences are catching up with the binary options industry. With regulators tightening down, we will be seeing a lot of changes in the coming years. It is likely that the bad behavior of a lot of brokers is going to bring all of us down for a while.
But if there is one thing I know, it is that both gambling and investing are ubiquitous human activities, and they are not going anywhere. That means that the binary options industry should survive the coming changes, albeit in a new, changed form. If you want a preview of what that future looks like, Nadex is probably a prime example. Hopefully more companies around the world will start following that example and offering transparent, grounded binary trading services which are honest and fair.