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ASIC cracks down on binary options

ASIC has banned the sale of binary options to retail clients, effective from 3 May 2021.

The decision comes after ASIC found that binary options have resulted in significant losses for retail clients.

In 2018, ASIC estimated that net losses from retail investors trading binary options were $490 million. The regulator issued a warning in response and the losses for 2019 shrunk to $6.7 million.

Reviews by the regulator conducted in 2017 and 2019 found that 80% of retail clients who traded binary options lost money.

Binary options have an "all or nothing" pay structure, the investor either loses the entire investment amount or makes money.

They also operate on short contracts. ASIC even found one provider of binary options traded them with a contract duration of less than six minutes.

And, often the expected payoff for a binary option contract is lower than the initial investment.

"Binary options' product characteristics make them incompatible with investment or risk management use by retail clients," ASIC commissioner Cathie Armour said.

"ASIC's product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability."

A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties—the binary option issuer and the client.

The "all-or-nothing" payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. For example, a binary option might pay out if a central bank lowers interest rates or the price of goal hits a certain level within a certain timeframe.

There is also counterparty risk in binary option trading, with ASIC's MoneySmart noting in instances where the provider becomes insolvent the investor might not get their money back.

"Determine the true odds of an event occurring from the binary price (the 'implied probability'). The midpoint between the buy/sell prices is a good indicator of the expected probability of the binary settling at 100," MoneySmart said.

"For example, a binary buy price of $10 and sell price of $14 has a midpoint of $12. This indicates that the market expects there is only about a 12% probability of the binary settling at 100. In other words, there's only a 12% chance of you winning."

Read more: ASICMoneySmartCathie Armour