Australians have lost millions of dollars trading binary options – a “harmful” and “high-risk” financial product.
On 3 May, the Australian Securities & Investments Commission (ASIC) issued a product intervention order banning the issue and distribution of binary options to retail clients.
This order has now been extended until 1 October 2031.
We explore what binary options are and why they are so harmful, as outlined by ASIC.
What are binary options?
Binary options are over-the-counter (OTC) derivatives that allow clients to speculate on the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to:
- Movements in the price of a financial product, such as shares in a specific company.
- Movements in a market index, such as the S&P/ASX 200.
- An economic development, such as central bank interest rate decisions.
Reason for the ban
The product intervention order came into effect after ASIC reviews in 2017 and 2019 found that approximately 80 percent of retail clients lost money trading binary options.
In the 13 months to 3 May 2021, before the ban took effect, ASIC found that retail clients incurred significant losses trading binary options. For example:
- 74–77 percent of active retail clients lost money trading binary options.
- Retail client accounts made net losses of $14 million in aggregate.
- Loss-making retail client accounts made net losses totalling $15.7 million, while profit-making retail client accounts only made net profits of $1.7 million.
Why binary options are so harmful
ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of the following product characteristics:
- A structure similar to gambling where one of the two possible outcomes for a binary option contract is that the person loses their entire investment.
- Short contract duration (e.g. the average contract duration of binary options traded with one provider was less than six minutes).
- Negative expected returns (i.e. the present value of the expected payoff for a binary option contract is lower than the initial investment).
What impact will the ban have?
Since coming into effect on 3 May 2021, ASIC’s ban has been effective in preventing retail clients from losing money trading binary options in Australia. ASIC’s extension of the product intervention order ensures binary option protections in Australia remain in line with those in force in comparable markets overseas.
ASIC Deputy Chair Karen Chester said, “Binary options are harmful, high-risk financial products resulting in millions of dollars in losses for retail investors before our ban. Extending our binary options ban until 2031 ensures this important protection for retail investors will continue.”
