A binary option is a

financial Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

exotic option In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic opt ...

in which the payoff is either some fixed monetary amount or nothing at all.Breeden, D. T., & Litzenberger, R. H. (1978). "Prices of state-contingent claims implicit in option prices". ''Journal of Business'', 621–651.Gatheral, J. (2006). ''The volatility surface: a practitioner's guide'' (Vol. 357). John Wiley & Sons. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires

in-the-money In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a thr ...

while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the

American Stock Exchange NYSE American, formerly known as the American Stock Exchange (AMEX), and more recently as NYSE MKT, is an American stock exchange situated in New York City. AMEX was previously a mutual organization, owned by its members. Until 1953, it was known ...

).Binary Option Definition
Investopedia. Retrieved 2013-06-30. While binary options may be used in theoretical asset pricing, they are prone to

fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...

in their applications and hence banned by regulators in many jurisdictions as a form of

gambling Gambling (also known as betting or gaming) is the wagering of something of value ("the stakes") on a random event with the intent of winning something else of value, where instances of strategy are discounted. Gambling thus requires three el ...

. Many binary option outlets have been exposed as fraudulent. The U.S.

FBI The Federal Bureau of Investigation (FBI) is the domestic Intelligence agency, intelligence and Security agency, security service of the United States and its principal Federal law enforcement in the United States, federal law enforcement age ...

is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates. The

European Securities and Markets Authority The European Securities and Markets Authority (ESMA) is an independent European Union Authority located in Paris. ESMA replaced the Committee of European Securities Regulators (CESR) on 1 January 2011. It is one of the three new European Supe ...

(ESMA) have banned retail binary options trading.

Australian Securities and Investments Commission The Australian Securities and Investments Commission (ASIC) is an independent commission of the Australian Government tasked as the national corporate regulator. ASIC's role is to regulate company and financial services and enforce laws to pro ...

(ASIC) considers binary options as a "high-risk" and "unpredictable" investment option, and finally also banned binary options sale to retail investors in 2021. The FBI estimates that the scammers steal US$10 billion annually worldwide. The use of the names of famous and respectable people such as

Richard Branson Sir Richard Charles Nicholas Branson (born 18 July 1950) is a British billionaire, entrepreneur, and business magnate. In the 1970s he founded the Virgin Group, which today controls more than 400 companies in various fields. Branson expressed ...

to encourage people to buy fake "investments" is frequent and increasing. Articles published in ''

The Times of Israel ''The Times of Israel'' is an Israeli multi-language online newspaper that was launched in 2012. It was co-founded by Israeli journalist David Horovitz, who is also the founding editor, and American billionaire investor Seth Klarman.

'' newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave isconscience at the door". Following an investigation by ''The Times of Israel'', Israel's cabinet approved a ban on sale of binary options in June 2017, and a law banning the products was approved by the

Knesset The Knesset ( he, הַכְּנֶסֶת ; "gathering" or "assembly") is the unicameral legislature of Israel. As the supreme state body, the Knesset is sovereign and thus has complete control of the entirety of the Israeli government (with ...

in October 2017. On January 30, 2018,

Facebook Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin M ...

banned advertisements for binary options trading as well as for

cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank A bank is a financial i ...

and

initial coin offering An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cr ...

s (ICOs).

Google Google LLC () is an American multinational technology company focusing on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. ...

and

Twitter Twitter is an online social media and social networking service owned and operated by American company Twitter, Inc., on which users post and interact with 280-character-long messages known as "tweets". Registered users can post, like, and ...

announced similar bans in the following weeks.

Function

Binary options "are based on a simple 'yes' or 'no' proposition: Will an underlying asset be above a certain price at a certain time?" Traders place wagers as to whether that will or will not happen. If a customer believes the price of an underlying asset will be above a certain price at a set time, the trader buys the binary option, but if he or she believes it will be below that price, they sell the option. In the U.S. exchanges, the price of a binary is always under $100.

Investopedia Investopedia is a financial media website headquartered in New York City. Founded in 1999, Investopedia provides investment dictionaries, advice, reviews, ratings, and comparisons of financial products such as securities accounts. Investopedia ha ...

described the binary options trading process in the U.S. thus:

binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then you will pay $44.50, if you decide to sell right then you'll sell at $42.50. Let's assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100 – $44.50 = $55.50 (less fees). This is called being "in the money". But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This is called being "out of the money". The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss (compared to letting it expire out of the money).

In the U.S., every binary option settles at $100 or $0, $100 if the bet is correct, 0 if it is not. In the online binary options industry, where the contracts are sold by a broker to a customer in an OTC manner, a different option pricing model is used. Brokers sell binary options at a fixed price (e.g., $100) and offer some fixed percentage return in case of in-the-money settlement. Some brokers, also offer a sort of out-of-money reward to a losing customer. For example, with a win reward of 80%, out-of-money reward of 5%, and the option price of $100, two scenarios are possible. In-the-money settlement pays back the option price of $100 and the reward of $80. In case of loss, the option price is not returned but the out-of-money reward of $5 is granted to the customer. On non-regulated platforms, client money is not necessarily kept in a trust account, as required by government

financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...

, and transactions are not monitored by third parties in order to ensure fair play. Binary options are often considered a form of gambling rather than investment because of their negative cumulative payout (the brokers have an edge over the investor) and because they are advertised as requiring little or no knowledge of the markets. Gordon Pape, writing in

Forbes ''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family. Published eight times a year, it features articles on finance, industry, investing, and marketing topics. ''Forbes'' also re ...

.com in 2010, called binary options websites "gambling sites, pure and simple", and said "this sort of thing can quickly become addictive... no one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame". Pape observed that binary options are poor from a gambling standpoint as well because of the excessive "house edge". One online binary options site paid $71 for each successful $100 trade. "If you lose, you get back $15. Let's say you make 1,000 "trades" and win 545 of them. Your profit is $38,695. But your 455 losses will cost you $38,675. In other words, you must win 54.5% of the time just to break even". The U.S.

Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange Ac ...

warns that "some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect given the payout structure."

Black–Scholes valuation

In the

Black–Scholes model The Black–Scholes or Black–Scholes–Merton model is a mathematical model for the dynamics of a financial market containing derivative investment instruments. From the parabolic partial differential equation in the model, known as the Blac ...

, the price of the option can be found by the formulas below. In fact, the Black–Scholes formula for the price of a vanilla

call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...

(or

put option In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the ''underlying''), at a specified price (the ''strike''), by (or at) a s ...

) can be interpreted by decomposing a call option into an asset-or-nothing call option minus a cash-or-nothing call option, and similarly for a put – the binary options are easier to analyze, and correspond to the two terms in the Black–Scholes formula. In these, ''S'' is the initial stock price, ''K'' denotes the

strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...

, ''T'' is the time to maturity, ''q'' is the dividend rate, ''r'' is the

risk-free interest rate The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations. Since the risk-free ra ...

and

\sigma

is the volatility.

\Phi

denotes the

cumulative distribution function In probability theory and statistics, the cumulative distribution function (CDF) of a real-valued random variable X, or just distribution function of X, evaluated at x, is the probability that X will take a value less than or equal to x. Ev ...

of the

normal distribution In statistics, a normal distribution or Gaussian distribution is a type of continuous probability distribution for a real-valued random variable. The general form of its probability density function is : f(x) = \frac e^ The parameter \mu ...

, :

\Phi(x) = \frac \int_^x e^ dz.

and, :

d_1 = \frac.

d_2 = d_1-\sigma\sqrt.

Cash-or-nothing call

This pays out one unit of cash if the spot is above the strike at maturity. Its value now is given by :

C = e^\Phi(d_2). \,

Cash-or-nothing put

This pays out one unit of cash if the spot is below the strike at maturity. Its value now is given by :

P = e^\Phi(-d_2). \,

Asset-or-nothing call

This pays out one unit of asset if the spot is above the strike at maturity. Its value now is given by :

C = Se^\Phi(d_1). \,

Asset-or-nothing put

This pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by: :

P = Se^\Phi(-d_1). \,

American style

American option In finance, the style or family of an option is the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options� ...

gives the holder the right to exercise at any point up to and including the expiry time

T

. That is, denoting by

K

the strike price, if

K\geq S

(resp.

K\leq S

), the corresponding American binary put (resp. call) is worth exactly one unit. Let :

a=\frac\ln(K/S)\text\xi=\frac-\frac\textb=\sqrt. \,

The price of a cash-or-nothing American binary put (resp. call) with strike

K (resp. K>S) and time-to-expiry T is:
: \frace^\left\ \, where \operatorname denotes the

error function In mathematics, the error function (also called the Gauss error function), often denoted by , is a complex function of a complex variable defined as: :\operatorname z = \frac\int_0^z e^\,\mathrm dt. This integral is a special (non-elementary ...

and

\operatorname

denotes the

sign function In mathematics, the sign function or signum function (from '' signum'', Latin for "sign") is an odd mathematical function that extracts the sign of a real number. In mathematical expressions the sign function is often represented as . To avoi ...

. The above follows immediately from expressions for the Laplace transform of the distribution of the conditional first passage time of Brownian motion to a particular level.

Foreign exchange

If we denote by ''S'' the FOR/DOM exchange rate (i.e., 1 unit of foreign currency is worth S units of domestic currency) we can observe that paying out 1 unit of the domestic currency if the spot at maturity is above or below the strike is exactly like a cash-or nothing call and put respectively. Similarly, paying out 1 unit of the foreign currency if the spot at maturity is above or below the strike is exactly like an asset-or nothing call and put respectively. Hence if we now take

r_

, the foreign interest rate,

r_

, the domestic interest rate, and the rest as above, we get the following results. In case of a digital call (this is a call FOR/put DOM) paying out one unit of the domestic currency we get as present value, :

C = e^\Phi(d_2) \,

In case of a digital put (this is a put FOR/call DOM) paying out one unit of the domestic currency we get as present value, :

P = e^\Phi(-d_2) \,

While in case of a digital call (this is a call FOR/put DOM) paying out one unit of the foreign currency we get as present value, :

C = Se^\Phi(d_1) \,

and in case of a digital put (this is a put FOR/call DOM) paying out one unit of the foreign currency we get as present value, :

P = Se^\Phi(-d_1) \,

Skew

In the standard Black–Scholes model, one can interpret the premium of the binary option in the risk-neutral world as the expected value = probability of being in-the-money * unit, discounted to the present value. The Black–Scholes model relies on symmetry of distribution and ignores the

skewness In probability theory and statistics, skewness is a measure of the asymmetry of the probability distribution of a real-valued random variable about its mean. The skewness value can be positive, zero, negative, or undefined. For a unimodal d ...

of the distribution of the asset. Market makers adjust for such skewness by, instead of using a single standard deviation for the underlying asset

\sigma

across all strikes, incorporating a variable one

\sigma(K)

where volatility depends on strike price, thus incorporating the

volatility skew Volatility smiles are implied volatility patterns that arise in pricing financial option (finance), options. It is a parameter (implied volatility) that is needed to be modified for the Black–Scholes formula to fit market prices. In particular ...

into account. The skew matters because it affects the binary considerably more than the regular options. A binary call option is, at long expirations, similar to a tight call spread using two vanilla options. One can model the value of a binary cash-or-nothing option, ''C'', at strike ''K'', as an infinitesimally tight spread, where

C_v

is a vanilla European call: :

C = \lim_ \frac

Thus, the value of a binary call is the negative of the

derivative In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. F ...

of the price of a vanilla call with respect to strike price: :

C = -\frac

When one takes volatility skew into account,

\sigma

is a function of

K

: :

C = -\frac = -\frac - \frac \frac

The first term is equal to the premium of the binary option ignoring skew: :

-\frac = -\frac = e^\Phi(d_2) = C_

\frac

is the

Vega Vega is the brightest star in the northern constellation of Lyra. It has the Bayer designation α Lyrae, which is Latinised to Alpha Lyrae and abbreviated Alpha Lyr or α Lyr. This star is relatively close at only from the Sun, an ...

of the vanilla call;

\frac

is sometimes called the "skew slope" or just "skew". Skew is typically negative, so the value of a binary call is higher when taking skew into account. :

C = C_ - \mathrm_v * \mathrm

Relationship to vanilla options' Greeks

Since a binary call is a mathematical derivative of a vanilla call with respect to strike, the price of a binary call has the same shape as the delta of a vanilla call, and the delta of a binary call has the same shape as the gamma of a vanilla call.

Regulation and fraud

Many binary option "brokers" have been exposed as fraudulent operations. In those cases, there is no real

brokerage A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

; the customer is betting against the broker, who is acting as a bucket shop. Manipulation of price data to cause customers to lose is common. Withdrawals are regularly stalled or refused by such operations; if a client has good reason to expect a payment, the operator will simply stop taking their phone calls. Though binary options sometimes trade on

regulated Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...

exchange Exchange may refer to: Physics *Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States * Exchange, Indiana, an unincorporated community * ...

, they are generally unregulated, trading on the Internet, and prone to fraud. Most of the binary options brokers are registered in

Saint Vincent and the Grenadines Saint Vincent and the Grenadines () is an island country in the Caribbean. It is located in the southeast Windward Islands of the Lesser Antilles, which lie in the West Indies at the southern end of the eastern border of the Caribbean Sea wh ...

and offering their services globally. The country's Financial Services Authority has issued a warning to the general public about unlicensed Forex and binary options trading provided by entities registered in Saint Vincent and the Grenadines.

European Union

On 23 March 2018, The

, a

European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...

financial regulatory institution and

European Supervisory Authority The European System of Financial Supervision (ESFS) is the framework for financial supervision in the European Union that has been in operation since 2011. The system consists of the ''European Supervisory Authorities'' (ESAs), the European Syste ...

located in Paris, agreed to new temporary rules prohibiting the marketing, distribution or sale of binary options to retail clients.

Australia

The

(ASIC) warned Australian investors on 13 February 2015 against Opteck, an unlicensed binary option provider. The ASIC later began a focused effort to control unlicensed derivative providers, including "review" websites, broker affiliates, and managed service providers related to binary option products. ASIC finally released a ban on sale of binary options to retail clients in 2021.

Belgium

In August 2016, Belgium's

Financial Services and Markets Authority The Financial Services and Markets Authority (FSMA) ( nl, Autoriteit voor Financiële Diensten en Markten, french: L'Autorité des services et marchés financiers) is the financial regulatory agency in Belgium. As a supervisory authority, the F ...

banned binary options schemes, based on concerns about widespread fraud.

Canada

No firms are registered in Canada to offer or sell binary options, so no binary options trading is currently allowed. Provincial regulators have proposed a complete ban on all binary options trading include a ban on online advertising for binary options trading sites. A complete ban on binary options trading for options having an expiration less than 30 days was announced on September 28, 2017.

Cyprus

On May 3, 2012, the

Cyprus Securities and Exchange Commission The Cyprus Securities and Exchange Commission, ( gr, Επιτροπή Κεφαλαιαγοράς) better known as CySEC, is the financial regulatory agency of Cyprus. As an EU member state, CySEC's financial regulations and operations comply with ...

(CySEC) announced a policy change regarding the classification of binary options as

financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...

s. The effect is that binary options platforms operating in Cyprus, where many of the platforms are now based, would have to be CySEC regulated within six months of the date of the announcement. CySEC was the first EU

MiFID Markets in Financial Instruments Directive 20142014/65/EU commonly known as MiFID 2 (Markets in financial instruments directive 2), is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework fo ...

-member regulator to treat binary options as financial instruments. In 2013, CySEC prevailed over the disreputable binary options brokers and communicated intensively with traders in order to prevent the risks of using unregulated financial services. On September 19, 2013, CySEC sent out a press release warning investors against binary options broker TraderXP, who was not and had never been licensed by CySEC. On October 18, 2013, CySEC released an investor warning about binary options broker NRGbinary and its parent company NRG Capital (CY) Ltd., stating that NRGbinary was not and had never been licensed by CySEC. CySEC also temporarily suspended the license of the Cedar Finance on December 19, 2013, because the potential violations referenced appeared to seriously endanger the interests of the company's customers and the proper functioning of capital markets, as described in the official issued press release. CySEC also issued a warning against binary option broker PlanetOption at the end of the year and another warning against binary option broker LBinary on January 10, 2014, pointing out that it was not regulated by the Commission and the Commission had not received any notification by any of its counterparts in other European countries to the effect of this firm being a regulated provider. The Cyprus regulator imposed a penalty of €15,000 against ZoomTrader. OptionBravo and ChargeXP were also financially penalized. CySEC also indicated that it had voted to reject the ShortOption license application. In 2015, CySEC repeatedly fined Banc De Binary for several violations including the solicitation of U.S. clients. In 2016, the regulator fined Banc De Binary Ltd once again for violation of its legislation. The broker has come to a settlement of €350,000.

France

In August 2016, France's ''Sapin II'' bill on transparency was announced by the Autorité des Marchés Financiers (AMF), seeking to outlaw all financial derivatives advertising. The AMF stated that it would ban the advertising of certain highly speculative and risky financial contracts to private individuals by electronic means. The document applies specifically to binary options, and to contracts for difference (CFDs), and financial contracts on currencies. The French regulator is determined to cooperate with the legal authorities to have illegal websites blocked. The law also prohibits all forms of sponsorship and partnership that results in direct or indirect advertising of the financial products it covers. This ban was seen by industry watchers as having an impact on sponsored sports such as European football clubs. The Cyprus-based company 24Option was banned from trading in France by AMF earlier in 2016. They had sponsored a well-known Irish

mixed martial artist Mixed martial arts (MMA), sometimes referred to as cage fighting, no holds barred (NHB), and ultimate fighting, and originally referred to as Vale Tudo is a full-contact combat sport based on striking, grappling and ground fighting, incorp ...

Conor McGregor Conor Anthony McGregor ( ga, Conchúr Antóin Mac Gréagóir; born 14 July 1988) is an Irish professional mixed martial artist. He is a former Ultimate Fighting Championship (UFC) featherweight and lightweight double-champion. He is the first ...

, who in turn promoted the company through social media.

Germany

German

Federal Financial Supervisory Authority The Federal Financial Supervisory Authority (german: Bundesanstalt für Finanzdienstleistungsaufsicht, Bundesanstalt für Finanzdienstleistungsaufsicht) better known by its abbreviation BaFin is the financial regulatory authority for Germany. It ...

(BaFin) has been regularly publishing investor warnings. On November 29, 2018, BaFin announced that it is planning to "prohibit the marketing, distribution and sale of binary options to retail clients at a national level".

Indonesia

According to the Commodity Futures Trading Regulatory Agency (CoFTRA) in Indonesia, also known as BAPPEBTI, binary options are considered a form of online gambling and is illegal in the country. The move to delegalize binary options stems from concerns that the public may be swayed by misleading advertisements, promotions, and offers to participate in fraudulent practices that operate under the guise of binary options trading. As of 2 February 2022, at least 92 binary options websites, including Binomo, IQ Option, and Olymp Trade, have been classified as unlicensed operators and blocked by the Indonesian government.

Israel

;Binary options trading In March 2016 binary options trading within

Israel Israel (; he, יִשְׂרָאֵל, ; ar, إِسْرَائِيل, ), officially the State of Israel ( he, מְדִינַת יִשְׂרָאֵל, label=none, translit=Medīnat Yīsrāʾēl; ), is a country in Western Asia. It is situated ...

was banned by the

Israel Securities Authority The Israel Securities Authority (ISA) is the national securities regulator of Israel. Established by law in 1968, the Israel Securities Authority sees its mandate as a way to ensure an efficient capital market based on transparency and fairness. ...

, on the grounds that such trading is essentially gambling and not a form of investment management. The ban was extended to overseas clients as well in October 2017. It was approved by the

in October, despite strong opposition from the binary options industry. ;Fraud In 2016 ''

'' ran several articles on binary options fraud. "The wolves of Tel Aviv: Israel's vast, amoral binary options scam exposed" revealed that the industry is a scam. A second article describes in detail how a binary options salesman fleeced clients. "According to one ex-employee of a firm that employs over 1,000 people in a high-rise office building in

Tel Aviv Tel Aviv-Yafo ( he, תֵּל־אָבִיב-יָפוֹ, translit=Tēl-ʾĀvīv-Yāfō ; ar, تَلّ أَبِيب – يَافَا, translit=Tall ʾAbīb-Yāfā, links=no), often referred to as just Tel Aviv, is the most populous city in the G ...

, losses are guaranteed because the 'dealing room' at the binary options firm controls the trading platform — like the crooked ownership of a rigged

casino A casino is a facility for certain types of gambling. Casinos are often built near or combined with hotels, resorts, restaurants, retail shopping, cruise ships, and other tourist attractions. Some casinos are also known for hosting live entertai ...

manipulating the

roulette wheel Roulette is a casino game named after the French word meaning ''little wheel'' which was likely developed from the Italian game Biribi''.'' In the game, a player may choose to place a bet on a single number, various groupings of numbers, the ...

". In July 2016 the Israeli binary option firms Vault Options and Global Trader 365 were ordered by the

U.S. District Court for the Northern District of Illinois The United States District Court for the Northern District of Illinois (in case citations, N.D. Ill.) is the federal trial-level court with jurisdiction over the northern counties of Illinois. Appeals from the Northern District of Illinois ar ...

to pay more than $4.5 million for unlawful off-exchange binary options trading, fraud, and registration violations. The companies were also banned permanently from operating in the United States or selling to U.S. residents. In November 2016 the

carried out a raid on the

Ramat Gan Ramat Gan ( he, רָמַת גַּן or , ) is a city in the Tel Aviv District of Israel, located east of the municipality of Tel Aviv and part of the Tel Aviv metropolitan area. It is home to one of the world's major diamond exchanges, and many ...

offices of binary option broker iTrader. The CEO and six other employees were charged with fraud, providing unlicensed investment advice, and obstruction of justice. On May 15, 2017, Eliran Saada, the owner of

Express Target Marketing A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all.Breeden, D. T., & Litzenberger, R. H. (1978). "Prices of state-contingent claims implicit in option prices". ''Journal of Busi ...

, which has operated the binary options companies InsideOption and SecuredOptions, was arrested on suspicion of fraud, false accounting, forgery,

extortion Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...

, and

blackmail Blackmail is an act of coercion using the threat of revealing or publicizing either substantially true or false information about a person or people unless certain demands are met. It is often damaging information, and it may be revealed to fa ...

. The case involves a Singaporean woman who claims to have lost over $500,000 to the firm. In August 2017

Israeli police The Israel Police ( he, משטרת ישראל, ''Mišteret Yisra'el''; ar, شرطة إسرائيل, ''Shurtat Isrāʼīl'') is the civilian police force of Israel. As with most other police forces in the world, its duties include crime fightin ...

superintendent Rafi Biton said that the binary trading industry had "turned into a monster". He told the Israeli

that criminal investigations had begun. In September 2017, the FBI arrested Lee Elbaz, CEO of binary options trading company Yukom Communications, upon her arrival in the United States. They arrested her for

wire fraud Mail fraud and wire fraud are terms used in the United States to describe the use of a physical or electronic mail system to fraud, defraud another, and are Federal crime in the United States, federal crimes there. Jurisdiction is claimed by the ...

and conspiracy to commit wire fraud. In 2019, Lee Elbaz was found guilty and sentenced to 22 years in prison. In February 2019, the FBI arrested Austin Smith, Founder of Wealth Recovery International, after his arrival in the United States. Smith was arrested for

due to his involvement as an employee of Binarybook.com.

Malta

In March 2013 the

Malta Financial Services Authority The Malta Financial Services Authority (MFSA) is a financial regulator of Malta. The MFSA was founded in 2002 when it assumed the responsibilities of the Central Bank of Malta, the Malta Stock Exchange, and the Malta Financial Services Centre. ...

(MFSA) announced that binary options regulation would be transferred away from Malta's Lottery and Gaming Authority. On 18 June 2013 MFSA confirmed that in their view binary options fell under the scope of the

Markets in Financial Instruments Directive Markets in Financial Instruments Directive 20142014/65/EU commonly known as MiFID 2 (Markets in financial instruments directive 2), is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework fo ...

(MiFID), which made Malta the second EU jurisdiction to regulate binary options as a financial instrument. This required providers to obtain a category 3 Investment Services license and conform to MiFID's

minimum capital requirement A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...

s; firms could previously operate from the jurisdiction with a valid Lottery and Gaming Authority license.

New Zealand

In April 2017,

New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...

's Financial Markets Authority (FMA) announced that all brokers that offer short-term investment instruments that settle within three days are required to obtain a license from the agency. This is intended to cover binary options as well as contracts for difference (CFDs).

United Kingdom

;Binary options trading In the UK, binary options were regulated by the

Gambling Commission The Gambling Commission is an executive non-departmental public body of the Government of the United Kingdom responsible for regulating gambling and supervising gaming law in Great Britain. Its remit covers arcades, betting, bingo, casinos, ...

rather than the

Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...

(FCA). This regulation, however, applied only to firms that have gambling equipment in the UK. The FCA in 2016 did propose bringing binary options under its jurisdiction and restricting them. They stated that binary options "did not appear to meet a genuine investment need". In March 2017,

Action Fraud The National Fraud Intelligence Bureau is a police unit in the United Kingdom responsible for gathering and analysing intelligence relating to fraud and financially motivated cyber crime. The NFIB was created as part of the recommendations of the ...

issued a warning on binary options. The

Isle of Man ) , anthem = "O Land of Our Birth" , image = Isle of Man by Sentinel-2.jpg , image_map = Europe-Isle_of_Man.svg , mapsize = , map_alt = Location of the Isle of Man in Europe , map_caption = Location of the Isle of Man (green) in Europe ...

, a self-governing Crown dependency for which the UK is responsible, has issued licenses to companies offering binary options as "games of skill" licensed and regulated under fixed odds betting by the

Isle of Man Gambling Supervision Commission The Isle of Man Gambling Supervision Commission ( gv, Barrantee Oaseirys Karrooghys Vannin) (formerly the Gambling Control Commission) is the Gaming Control Board of the Isle of Man. It regulates most forms of gambling in its territory including l ...

(GSC). This positions binary options as a form of gambling, and the administrator of the trading as something akin to a casino, as opposed to an

brokerage house A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

. On October 19, 2017, London police raided 20 binary options firms in London. On January 3, 2018, the FCA took over regulation of binary options from the Gambling Commission. In December 2018, FCA has proposed new rules which would permanently ban the sale, marketing and distribution of binary options to retail consumers. ;Fraud Fraud within the market is rife, with many binary options providers using the names of famous and respectable people without their knowledge. According to a national fraud and cybercrime reporting centre

, 664 binary options frauds were reported in 2015/16, increasing to 1,474 in 2016/17. The

City of London police The City of London Police is the territorial police force responsible for law enforcement within the City of London, including the Middle and Inner Temples. The force responsible for law enforcement within the remainder of the London region, ou ...

in May 2017 said that reported losses for the previous financial year were £13 million, increased from £2 million the year before. In the first half of 2017, 697 people reported losses totaling over £18 million.

United States

;Binary options trading In the United States, the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC) approved

exchange-traded An exchange-traded product (ETP) is a regularly priced security which trades during the day on a national stock exchange. ETPs may embed derivatives but it is not a requirement that they do so - and the investment memorandum (or offering document ...

binary options in 2008. Trading commenced on the

(AMEX) and the

Chicago Board Options Exchange The Chicago Board Options Exchange (CBOE), located at 433 West Van Buren Street in Chicago, is the largest U.S. options exchange with an annual trading volume of around 1.27 billion at the end of 2014. CBOE offers options on over 2,200 companies ...

(CBOE) in May and June 2008. AMEX (now NYSE American) offers binary options on some

exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...

s and a few highly liquid equities such as

Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...

and

. On the exchange binary options were called "fixed return options" (FROs). To reduce the threat of

market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...

of single stocks, FROs use a "settlement index" defined as a volume-weighted average of trades on the expiration day. AMEX and

Donato A. Montanaro Donato Anthony Montanaro Jr. is an American entrepreneur, stockbroker and private investor who was the founder of two separate stockbrokerages. Early life and education Montanaro received a Bachelor of Arts from University of Notre Dame, where, i ...

submitted a

patent application A patent application is a request pending at a patent office for the grant of a patent for an invention described in the patent specification and a set of one or more claims stated in a formal document, including necessary official forms and re ...

for exchange-listed binary options using a volume-weighted settlement index in 2005. CBOE offers binary options on the

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...

(SPX) and the CBOE Volatility Index (VIX). The tickers for these are BSZ and BVZ, respectively.

NADEX Nadex (Northern American Derivatives Exchange), formerly known as HedgeStreet, is a US-based retail-focused online binary options exchange. It offers retail trading of binary options and spreads on the most heavily traded forex, commodities and ...

, a U.S.-based

(CFTC) regulated exchange, launched binary options for a range of

Forex The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a comm ...

, and

stock indices In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance. Two of the ...

' markets in June 2009,. On March 30, 2010 the CFTC issued an amended Order of Designation to allow trades on NADEX to be intermediated. NADEX have since offered binary options trading between buyers and sellers. They do not participate in the trades. ;Fraud On June 6, 2013, the U.S. CFTC and the SEC jointly issued an Investor Alert to warn about fraudulent promotional schemes involving binary options and binary options trading platforms. The two agencies said that they had received numerous complaints of fraud about binary options trading sites, "including refusal to credit customer accounts or reimburse funds to customers;

identity theft Identity theft occurs when someone uses another person's personal identifying information, like their name, identifying number, or credit card number, without their permission, to commit fraud or other crimes. The term ''identity theft'' was co ...

; and manipulation of software to generate losing trades". Other binary options operations were violating requirements to register with regulators. In June 2013, U.S. regulators charged Israeli-Cypriot company

Banc De Binary Banc De Binary was an Israeli financial firm with a history of regulatory issues on three continents. On January 9, 2017, the company announced that it would be closing due to negative press coverage and its tarnished reputation. The firm also ...

with illegally selling binary options to U.S. investors. In February 2016, the company reached an $11 million settlement with U.S. authorities. Regulators found the company used a "virtual office" in New York's

Trump Tower Trump Tower is a 58-story, mixed-use skyscraper at 721–725 Fifth Avenue in the Midtown Manhattan neighborhood of New York City, between East 56th and 57th Streets. The building contains the headquarters for the Trump Organization, as well ...

in pursuit of its scheme, evading a ban on off-exchange binary option contracts. The company neither admitted nor denied the allegations. In November 2016, SEC published yet another Investor Alert on binary options websites. In 2016, In February 2017 ''

'' reported that the FBI was conducting an active international investigation of binary option fraud, emphasizing its international nature, saying that the agency was "not limited to the USA". Victims from around the world were asked to contact an FBI field office or the FBI's

Internet Crime Complaint Center The Internet Crime Complaint Center (IC3) is a division of the Federal Bureau of Investigation (FBI) concerning suspected Internet-facilitated criminal activity. The IC3 gives victims a convenient and easy-to-use reporting mechanism that alerts a ...

. The investigation is not limited to the binary options brokers, but is comprehensive and could include companies that provide services that allow the industry to operate.

Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

issuers will be informed of the fraudulent nature of much of the industry, which could possibly allow victims to receive a

chargeback A chargeback is a return of money to a payer of a transaction, especially a credit card transaction. Most commonly the payer is a consumer. The chargeback reverses a money transfer from the consumer's bank account, line of credit, or credit ca ...

, or refund, of fraudulently obtained money. On March 13, 2017, the FBI reiterated its warning, declaring that the "perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money". They also provide a checklist on how to avoid being victimized. There is also a popular binary options recovery services scam, where fraudsters promise to "hunt" down the binary options scammers and retrieve the money from them through legal methods. In January 2018, Boston federal prosecutors filed a complaint against Leonel Alexis Valerio Santana and Frank Gregory Cedeno, accusing them of such type of fraud. In August 2018, Santana was sentenced to 63 months in prison, three years of supervised release, and ordered to pay restitution of $105,869 (Cedeno was indicted in March and pleaded not guilty).

References

External links

Canadian securities regulators website
* {{DEFAULTSORT:Binary Option Options (finance) Investment Derivatives (finance) 2 (number) Finance fraud