Late Friday, the European authorities pulled some big news out of their collective hat, a magic trick which will far from delight the spread betting sector. The European Securities and Markets Authority (ESMA) is proposing a full ban on sales of binary options to retail customers. They will also consider other measures to protect consumers, such as clearer requirements on delineating risks in investment, and a limit placed on trading bonuses.
This is not the first time we’ve heard from regulators in the area of spread betting. Last December the Financial Conduct Authority in the UK spoke out about imposing stricter rules on firms selling contracts for differences (CFDs) online. The ESMA is considering capping leverage limits even more so than the FCA suggested, from 5-1 to 30-1 based on the asset’s volatility.
Contracts for difference are, in a nutshell, trading instruments based on tracking an asset’s market performance without owning the asset itself. Naturally, shares have fallen notably across the whole spread betting sector in the wake of the news, with the market leader IG Group down up to 15% at certain moments.
It is expected that the news will be fairly well received in the financial sector as a whole, since these options are frequently based on performance of assets over incredibly brief windows of time – as small as 30 seconds – and are considered very risky. Furthermore, the fees charged by many providers make steady performance on these trades a very shaky proposition.
Those most vulnerable to these risks are clearly the amateur investors who populate the retail sector and who may, ironically, be the most upset by any ban of binary options. Ignorance may not always be bliss, unless you’re winning, that is. In this case, what they don’t know about binary options may be hurting a great deal. There has been a reported £60 million lost to binary scams alone since 2012.
