The main problems and challenges of the binary options market:
• Failure of service providers (unregulated services) to meet their obligations. For example, the Commission on Commodity Futures Trading made a release in which noted that the largest number of claims is related specifically to refusals to satisfy customers` funds withdrawal requests.
• Cancellation of the positive results received by customers on transactions with binary options.
• Aggressive sales practices and insufficient risks disclosure. It should be noted that such behavior on the market is typical not only of unregulated providers. The market is highly competitive and only the most proactive providers survive.
• Binary options trading similar positioning with the gambling business. (Get rich quick & easy).
• “Substandard” analytical support – meaning the work of personal trading advisers.
•Manipulation on platforms.
• Change of option payment terms, after option`s acquisition by the client.
• Unexpected, undescribed limitations and other difficulties creation for the client.
The causes of the above described factors.
• Highly demended new financial instruments have always been a weapon for scammers. So-called screens are being created, under the guise of which funds are attracted.
• Binary Options attract not only retail investors with no experience, but also businessmen without it. As a result, this leads to bankruptcy with all the consequences.
• Undeveloped market. Not standardized market, as a result of which there are no effective risks hedging instruments.
• Lack of requirements regarding the process of attracting clients.
• Lack of requirements for managers and trade advisers.
• Liability not provided..
• Lack of pricing control by the regulator.
• Lack of transaction implementation standards and rules.
• Lack of dispute resolution mechanisms, as well as lack of expertise.
• Low level of customer awareness of the product.
• State regulation and supervision will help to counter fraud, solve the problem of unskilled providers in the industry, and monitor the adequacy of dealer’s own capitalization and the safety of clients’ funds.
• Requirements for the sales process and sales persons.
• Requirements for internal audit and information storage.
• Pricing regulation and monitoring.
• Standardization of contracts.
• Set ways of considering and settling disputes.
• Requirements for reporting and storing information.
• Control over the fair disclosure of information to the client.
It is useful to note that opponents of Binary Options emphasize two reasons that, in their opinion, make this trading instrument gambling:
• This is a market of predicting the growth or fall of an asset, rather than a real purchase of securities.
• The probability of a correct forecast for short time intervals is extremely small, which makes trading of these instruments as close as possible on guessing, not on the forecast.
Note also that many countries do not regulate binary options in the framework of financial transactions. Thus, the British FCA regulator does not consider binary options to be financial transaction.
The opinion of the other party is that these definitions are suitable for any other, speculative transaction in the market. Also, if the underlying asset of a binary option is a security, and the payment and value of the contract is determined by the volatility of this underlying asset, then it is a financial instrument and the trade should be controlled by the relevant supervisory authority.
Looking at the experience of the US and Japan, it is clear that a compromise was found and implemented through the introduction of certain conditions for binary options trading.
• Minimum expiration time.
With this measure regulators try to make binary options trading more conscious, since it is believed that a short interval trade is devoid of the analytical component. Also, at longer intervals, trading eliminates the possibility of price manipulation. For example, in the USA, the minimum contract term is 5 minutes, and in Japan 2 hours.
• Client`s prohibition of trading block without significant circumstances. As a rule, this can happen with incredibly successful trading.
• Option fixed level of payment, which cannot be changed during the term of the entire option.
• Payment information displaying for a series of trades so that traders can assess risks in advance.
• Disclosure of the maximum number of contracts for each instrument.
• Client`s ability to exit from the contract prior to its expiration. It should be noted that such conditions can be implemented to long-term expirations.
• Disclosure of information about the traders` success.
• Prohibition of advertising options as an easy way to invest.
• A number of other requirements.
Initially, binary options were conceived as a simplified way of concluding a deal on the market (just like a yes or no) that would be available to an investor with any trading experience. However, the developers of Binary Options, pursuing the simplification model, significantly transformed these tools. There was a wide variety of contracts, as a result some contracts can no longer be called simple. This led to the fact that in a number of jurisdictions where BOs are subject to the supervision of financial regulators, binary options trading has been standardized.