Canadian
Regulators Take Stance on Binary Options in Canada
The Canadian Securities Administrators (CSA),
comprised of the country’s thirteen key financial market regulators across
their respective provinces, today issued a release that warns Canadians to
‘beware of binary options platforms’, as the CSA said there is no company
currently registered in Canada to carry out such offerings to residents and
labeled it as illegal in the country.
The coordinated effort appears to be driven by a
number of clients that have been the victim of the scams of binary options providers
purporting to be legitimate and based in either Canada or other jurisdictions.
This follows recent related challenges that have surfaced.
The fact that the stance has been reached
simultaneously shows that trading binary options is becoming more popular for
Canadians despite its illegal status. This status is something residents may
not even be aware of, however, increasing awareness may be exactly what the
regulators are trying to do with this latest circular.
Industry challenges highlighted
“Canadians are exposing themselves to the high risk of
identity theft and fraud when signing up for these platforms that often request
their credit card information,” said Louis Morisset, Chair of the CSA and
President and CEO of the Autorité des marchés financiers, commenting in the CSA
press release.
Mr. Morisset added: “The CSA warns investors that if
they deal with these platforms, they risk the threat of thousands of dollars in
unauthorized withdrawals on their credit cards and of being stuck with high-interest
payments for a non-existent investment.”
The announcement referenced a url for clients to check
the registration status of investment companies and financial services
providers via the aretheyregistered.ca website, and the CSA listed a number of
steps clients can take when conducting due diligence on financial services
providers in general.
Some of the examples in the CSA announcement really
highlighted some of the darkest sides of online brokerage corruption with
regard to ethics. The announcement noted cases where clear market manipulation
was employed, such as noting how firms would arbitrarily extend the options
time-value if it was already in the money at expiration, in the hope that it
would subsequently turn into a loss (instead of booking the winning profit that
the client had rightfully earned).
In the FX market this could be compared to
stop-hunting, or asymmetrical slippage, or less directly “spoofing” in
securities markets with the intent to deceive for a financial gain. It is wrong
in any form, and not a fault of the product but rather its facilitator.
CSA warns Canadians
The CSA compared this popular form of retail financial
market speculation to gambling and “all or nothing” bets, and added that
clients often cannot access profits in cases when gains are realized as the
watchdog alleged such winnings didn’t exist.
Unfortunately, this can be true for firms that are not
employing best practices or maintaining high standards of commercial honor, and
that employ a more subtle form of scamming – this can go undetected for long
periods of time until it’s too late.
It’s hard to really tell what standards a firm has
when it has no regulatory status and just a website, and conversely, even
regulated firms can partake in actions that harm clients financially. Thus
proper due diligence is needed, but it is far more difficult to ascertain for
unregulated firms.
This conundrum is further complicated when there are
companies soliciting in jurisdictions where the product is not even permitted,
such as in Canada. This trend of warnings has been paralleled elsewhere as
regulators have been tormented by the clones and purported providers that aim
to dupe investors, as evidenced by the large number of announcements, many of
which have been covered by Finance Magnates.
Product not regulated in Canada
While the regulator’s claims have merit, it appears
that the CSA is perhaps also unaware of the legitimate providers that exist
outside of Canada, regulated in other jurisdictions, and not recognized as
gambling (although at the same time the CSA is not alone in taking this view).
Binary options trading is coming under scrutiny for best-practices considering
that related rules are still new and evolving in some places.
Nonetheless, the strong stance taken by the CSA today
means that whether a firm is regulated elsewhere or not, the product is not
regulated in Canada at the moment, and therefore the watchdog’s cannot protect
clients, and any firms soliciting these products are doing so illegally.
Excluding the firms that are giving binary options
trading a bad name, regarding to the real binary options industry that exists,
if we compare certain exchange-traded index options in the US, a similar
argument could be made that trading US stock options could be akin to gambling.
One example is when a premium is wiped out due to an adverse market move which
could create a 100% loss scenario while the same move in the other direction
could have doubled the options intrinsic value.
It really depends on the trading strategy and style
(and contract specifications) with regard to whether trading is more akin to
gambling or investing (I think the same can be said for almost any asset class
where leverage and fast trading can be employed).
Trading or gambling?
Since many binary options contracts have embedded
profit/loss targets (in order to appeal to beginners and simplify trading),
from a different context this can be considered all or nothing (for the amount
invested) and thus appear like a gamble or roll of the dice.
Yet, even highly calculated day trading in blue chip
stocks, with pre-determined risk/reward ratio, may either have their stop-loss
triggered or limit-hit, in a very small amount of time, such as during a large
trade size from a proprietary day trader looking to scalp a quick price
movement. The context here is important for differentiating between investing
and trading, and trading versus gambling.
Nonetheless, the CSA is aiming to protect its
residents and the move is understandable as Canadian investors would be taking
huge risks potentially with binary options firms where there is no oversight or
remedial options, and even worse, potential scam artists – as described in the
update from CSA.
Future prospects in Canada
While some binary options providers may be regulated
elsewhere yet soliciting in Canada, the CSA doesn’t recognize the difference,
and thus it is putting those providers into the same pool of potentially
flagrant companies.
Yet the CSA really doesn’t have any other choice,
without proper regulatory guidelines in place that could potentially create a
legitimate offering in Canada and which could improve market integrity while
protecting clients through education and enforcing best practices for binary
options providers. At the moment, this is all wishful thinking, yet the hard
stance today could be a stepping stone for future action(s).
Unfortunately, as is the case in most financial
markets and industries, the acts of a few unscrupulous firms and people can
make it more difficult for legitimate providers and the existing marketplace.
Just yesterday, Israel’s financial markets watchdog issued a similar order.
Ideally, the CSA could conduct research on how binary
options could be regulated and add revenue for Canadian regulators, while
opening new markets, if a new licensing segment was established. But that seems
to be the furthest thing from the current tone of today’s announcement, yet a
valid future potential course of action if binary options continue to be
embraced by other regulators – it could maybe one day be legal in Canada.
From a larger context, the aspects of best-execution,
among other areas, are still a challenge as accurate price and fair dealing
underline the goals of market integrity.
News link: http://www.financemagnates.com/forex/regulation/canadian-regulators-take-stance-on-binary-options-in-canada/
Belgium’s Financial Services and Markets Authority (FSMA) has issued a warning once again urging the public to be cautious about the activities of a list of companies operating illegally within Belgian territory. Most of these concern binary options and forex products, CFD sectors and recovery rooms.
