Binary Options: Counterparty Risks and Regulatory Concerns
Summary
The discussion explains why binary options have a poor reputation, focusing on the risks of trading through unregulated or unreliable websites. Unlike products traded and cleared on standard options exchanges, some binary options are offered directly by firms that control the platform and handle customer funds. Contributors describe allegations of manipulated trading interfaces, blocked withdrawals, and deceptive marketing designed to attract inexperienced investors. These are presented as reported concerns, not as evidence that every provider behaves this way.
A UK-based professional trader adds a contrasting personal account: they traded digitals through an established multi-instrument platform without encountering those problems. They suggest regulators may object because customers can misunderstand the risks and short-dated payouts may encourage gambling-like behavior. The discussion also mentions digital payoffs in sports betting and the use of Bachelier rather than lognormal volatility models for some correlated payoff work. It offers perspectives rather than systematic evidence, and its regulatory comments are specific to the contributor’s understanding of the UK at that time.
Key ideas
- Some binary options are offered directly by firms rather than traded and cleared on standard options exchanges.
- Reported risks include dishonest platform practices, deceptive advertising, and obstacles to withdrawing funds.
- A professional trader describes a different experience using an established platform, showing that provider practices can vary.
- Regulatory concerns cited include customer misunderstanding and the gambling-like appeal of short-dated payouts.
- Digital payoffs also appear in sports betting, where one contributor says Bachelier volatility modeling was used for correlated payoffs.
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Full text
# Why do Binary Options have a bad reputation? # Why do Binary Options have a bad reputation? Actually, I have no experience with binary options trading but on the internet, I see that people talk about them in a bad way. Why does binary options trading has a bad reputation? Thanks ## Answer by JoshK (score 4) https://quant.stackexchange.com/a/60914 Binary options are not traded on standard options exchanges and cleared OCC. Instead you are trading vs individual houses/web sites. These sites have been accused on not paying, freezing funds, and generally creating barriers to allow the customer to benefit from winning trades. ## Answer by Pleb (score 4) https://quant.stackexchange.com/a/60916 Adding to the answer of @JoshK, many of the firms offering binary options often operate their scams by advertising their trading platforms on sites like Facebook. Their trading platform and website are designed to look very professional, making you think the company is legit. Some of the scammers go to the extent of creating YouTube accounts where they seemingly "daytrade" binary options with success on their own trading platform, and thus lure in new "uninformed" investors to their website/scam. Be aware that the trading platform is rigged and in many cases they "let" you win a few trades, in order for you to deposit even more money into your account, and consequently trade larger positions. This will inevitably end with the investor loosing all of his money, if he keeps trading on their rigged trading platform. If you "win" a few rounds and decide to withdraw your money, they will do whatever possible to refuse the customers withdrawal request. There are some informative sites here and here about the scams done with binary options. ## Answer by Mehness (score 2) https://quant.stackexchange.com/a/60920 I find the above answers very interesting, and they do manifestly support the premise of the question. This is not really an answer, but I do feel some right sizing may be appropriate, and I can offer some insight at least in terms of the UK. My background is one of being an ex institutional exotics trader, am UK based, and unlike most UK traders, who are banned from trading binaries (I believe since ESMA ruled as such perhaps as of Jan 2020), am fortunate (or not, depending on perspective) to have professional status and therefore am permitted to trade them, should I wish to do so, under FCA regs. The criticisms levelled above are both shocking, and completely alien to me. Digitals are not my instrument of choice for the most part for PA dealing, however have dabbled now and again, and have never encountered any of the issues mentioned above. Have traded them on a well established platform (which I've used for about a decade for other things) which offers them in addition to other instruments, and not from some unsolicited inbox / internet canvassing. Surprised that people do get duped by things like that! In terms of why the regulator here does not like them, I think broadly: A) they feel 'investors' do not understand the risks B) particularly with short dated digitals, they feel the payoff is too prone to enabling / potentiating problematic gambling behaviour. I've never been particularly enthralled by them, but I do like that they exist. Digital payoffs exist in sports betting, in the distant part I helped model correlated payoffs in this arena, and so that this post has non-zero math finance content, I will say here that Bachelier and not lognormal vols were de rigeur, but this is some years back. If this post is hated, I'll be happy to delete, just trying to offer a perspective from some experience and having seen some regulatory opinion some time ago.
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