History of the Binary Options industry

This article is an attempt to chronicle the history of the binary options industry, as seen from a Binary.com perspective.

Early years: 1999-2011

The Binary.com venture was founded in 1999 as a joint-venture between Jean-Yves Sireau and Regent Pacific Group Ltd., a company listed on the Hong Kong Stock Exchange. The venture was funded with a US$ 2 million capital injection by Regent Pacific.

The website, originally known as BetOnMarkets.com, was launched in early 2000 following registration of the company’s US patents.

During those days, binary options were considered to be a gambling/betting activity in the European Union, hence the company operated under betting licences issued by the Malta and Isle of Man gambling regulators.

Until around 2011, there were very few other companies in the binary options industry. Most companies that started in the field subsequently closed down:

• In 2001, Societe Generale (a large French bank) launched Click Options which was operated under financial regulation. The service was closed in 2010.
• In 2005, OANDA launched box options, a highly innovative binary options whereby the user gets to draw a “box” on the chart that the underlying instrument must hit or miss. This service was subsequently discontinued.
• In the UK, CityOdds launched binary options, only to close a while later.
• A few years later, BetsForTraders launched a binary options service from the Isle of Man, but also discontinued (and thereafter transferring clients to BetOnMarkets).
• In early 2011, major UK bookmakers such as William Hill launched binary options, as did Ladbrokes. Neither services were a success.

The seismic change: December 2011

The momentous event that changed the industry happened in December 2011 when the European Commission ruled that binary options were not gambling instruments, but were in fact financial instruments that should be regulated under MiFID by the financial regulators of each European country.

The change was likely due to good intentions on the part of the European Commission; they must have expected better investor protection by moving binary options from gambling to financial regulation. What happened instead was almost impossible to predict as binary options –– legitimate financial products in their own right –– became embroiled in one of the largest scams of the modern era.

In May 2012, the Cypriot financial regulator, CySEC, became the first European financial regulator to start regulating binary options.

The Israeli model emerges

This change in regulatory status rapidly led to drastic changes in the industry, driven by Israeli companies who set up operations in Cyprus. However, these companies had a very different business model in their minds compared to what Binary.com had been practising over the past 12 years.

What these Israeli companies had in mind was that with a Cypriot financial licence, they could then set up call centres to cold-call potential clients around the world. Indeed, as long as the industry was regulated as a gambling service, setting up call centres wouldn’t be possible, because cold-calling people and saying, “We are a gambling company; would you be interested to know about our services?” isn’t going to work. Recipients are going to think, “Gambling? Sorry, I’m not interested” and slam the phone down. But if they can say, “We are an EU-licensed financial services company; would you be interested to know about our services?” then recipients of the calls are likely to be much more receptive.

Rapid growth of the crooks

The highly aggressive and often unscrupulous business methods of these Israeli companies led to a very rapid explosion in the binary options industry. Hundreds of white label websites sprung up seemingly overnight, supported by a large army of call centre salespersons, and numerous fake “binary options broker” comparison websites and fake “awards” sites.

The global turnover of this largely crooked binary options call-centre industry is estimated to have grown rapidly, roughly doubling in size every year, from US$ 1 billion in 2011, to US$ 2 billion in 2012, US$ 4 billion in 2013, US$ 10 billion in 2014, and US$ 15 billion in 2015.

Binary.com’s declining market share

Whereas in 2010 Binary.com (then called BetOnMarkets.com) had about 80% of the market, by 2015 Binary.com’s market share had dropped to less than 10%, because we found it hard to compete with the call-centre operators. Binary.com has never operated a call centre.

The crackdown

The unscrupulous activities of the Israeli binary options companies led over time to innumerable complaints by their clients to the financial regulators in their home countries. It took time before these financial regulators took action, but finally in 2016 the tide turned and financial regulators, led by the AMF in France, started seriously investigating the binary options industry. The catalyst for this was the efforts of the Times of Israel, who in March 2016 wrote an article entitled The Wolves of Tel Aviv, and has followed it up with several more articles to date. The suicide of a Canadian client of an Israeli binary options firm also focused public attention on the industry and pressured governments and regulators to take action.

The Israeli government, realising that Israeli companies cheating hundreds of thousands of people around the world was not good for Israel’s image and that it could lead to an increase in anti-semitism, also decided to crack down on the industry. In February 2017, Israel declared that it was preparing a law to completely ban the industry in Israel. In anticipation of this, a number of Israeli binary options companies have been closing down their Israeli operations.

Japan

The binary options industry in Japan has followed a very different route. In 2013, the Japanese Financial Services Agency (FSA) decided to start regulating binary options. Its nine local offices are responsible for regulating each of their respective jurisdictions, with the Kanto Local Finance Bureau (KLFB) being the largest. Regulated entities are also bound by the Financial Futures Association of Japan (FFAJ), the industry’s self-regulating entity.

The Japanese authorities published very strict industry rules and guidelines (cf. conduct rules and guidelines, which apply on top of the already very stringent regulatory framework for regulated entities.

Presently there are nine companies licensed to offer binary options in Japan: FXTrade, ClickSec, YJFX, FX Prime,
Min-FX, Hirose,
Forex Exchange, IG, and Binary.com.

The extremely stringent regulation and oversight is having two effects:

• Clients of the regulated entities are very well protected;
• Because of the very tight restrictions on regulated entities, many Japanese investors decide to trade with offshore binary options companies instead, since they offer a wider range of options (especially shorter-term contracts), which put the regulated entities at a competitive disadvantage.

Therein lies the perennial dilemma for financial regulators in the modern era: if regulations are too tight, clients will start trading with offshore firms instead, whereas if regulations are too loose, crooked operators will take advantage.

The way forward

The current trend is for financial regulators in the EU to ban, either partially or completely, binary options in their jurisdiction. For example, Belgium has banned them completely, France has banned their advertisements, and the Netherlands has done the same.

This may not be the ideal approach. The example set by Japan shows that regulation can be effective for binary options, just like for any other financial product. The fundamental problem is not binary options per se, but the operation of call centres where unscrupulous operators cold-call potential investors – whether it be for penny stocks, binary options, FX trading, or any other volatile financial instrument. It’s the call centres that need regulating.

However, the increased scrutiny of binary options in the EU may still work out in favour of legitimate brokers who have a proven track record of operating at the highest standards of regulatory compliance. Greater consumer protection and regulatory oversight means that brokers who play by the rules no longer have to compete with the corrupt practices of fraudulent brokers.