The Australian Securities and Investments Commission (ASIC) has made a product intervention order banning the issue and distribution of binary options to retail clients, with effect from 3 May, 2021.
ASIC said binary options had “resulted in and are likely to result in significant detriment to retail clients”.
The binary options were found to have been likely to result in cumulative losses to retail clients over time because of their product characteristics:
- The ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
- Short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
- Negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment)
Additionally, binary options were found to have been incompatible with investment or risk management use by retail clients.
ASIC estimated that retail clients’ net losses from trading binary options stood at around $490 million in 2018, however the size of the market in Australia since then reduced significantly after it had issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions.
According to the corporate regulator, Australian retail clients were estimated to have made net losses of over $6.7 million in 2019.
The order would remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties would apply to contraventions of the product intervention order.