A Look at Binary Trading
Binary options are an innovative financial instrument that only recently became popular. Nevertheless, there are at least a hundred brokers offering binary options around the world, and they require regulation by appropriate bodies.
In England, these brokers are supposed to be licensed by the UK Gambling Commission (UKGC) before they can solicit clients from the region. While the organization mostly concerns various bingo, casino and betting websites (you can find more here about such companies), its has started regulating binary options too.
Why does a gambling regulator regulate binary options?
As mentioned earlier, binary options have only recently been recognized as a financial instrument. Compared to other products like stocks, bonds and futures, binary options are relatively young. They have been around for decades, but the public only had access to them starting in 2008 after the financial crisis.
So far, very few financial regulators around the world actually recognize them as a financial instrument, instead treating it like a betting scheme. The very structure of a binary options makes it seem so. Unlike other financial instruments where the investor earns increasing returns as the markets move in their direction, binary options always have a fixed outcome. There are only two options, win or lose, just like a conventional bet. Additionally, once the binary option is acquired, the investor can not make any further action until the set time limit is reached.
For these reasons, the FCA does not regulate binary options and the institution considers it as a bet.
What are the laws in other countries?
In the US, binary options are very strictly regulated by the CFTC , and only one company, Nadex, is allowed to offer the instrument. Fortunately, the SEC does consider binary options as a security, thus the licensing permission. In Europe, however, it is only CySEC that consider binary options as a security and regulate the brokers. All other regulatory bodies like BaFIN in Germany only allow a binary options broker to solicit clients from their country if they are first licensed by CySEC.
In England, a CySEC license is not sufficient for a broker to solicit clients from the area, and an additional license from UKGC is required. Binary options are not an FCA regulated financial instrument, but there was still a need for regulation. There have been very many complaints by investors who were defrauded in the binary options industry, and England authorities felt it necessary to protect their residents. Because of its similarities to betting and gambling, the UKGC was given the mandate to oversee binary options trading in England until the FCA accepted it as a financial instrument.
Will the current laws change?
In fact, there is currently a bill that proposes an amendment to the Financial Services and Markets Act of 2000, which defines the accepted financial instruments to be regulated by the FCA. If the amendments are approved, then the FCA would regulate binary options and binary options brokers would need a license from the same institution.
For now, all binary option activities within England are monitored by the UKGC, with all brokers expected to receive a license from the UKGC.