TDCI Securities Division Issues Investor Alert about Binary Options Schemes

Wednesday, June 08, 2016 | 05:18pm

NASHVILLE – The Tennessee Department of Commerce & Insurance’s Securities Division warns consumers about fraudulent schemes involving online binary options trading platforms. 

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.  An option, just like a stock or bond, is a security and is subject to state and federal regulation. 

A binary option, however, differs from a conventional option in significant ways.  A binary option is a type of options contract in which the payout is based entirely upon the successful prediction of the underlying value of a security or commodity on a future date and time.  There are only two possible outcomes: The investor receives a fixed amount of money for guessing correctly, or he or she loses the entire investment for guessing incorrectly. 

For example, the binary option might be as simple as whether the value of ABC stock will be greater than $32 per share at 12:00 noon on a particular future date.  If on that date and time, the stock is valued greater than $32 per share, the option holder would receive their initial investment plus 50 percent. If it is less than $32 per share, the option holder would receive nothing. 

“Binary options are essentially simplified options contracts that look more like online gambling than traditional securities or investments,” said TDCI’s Assistant Commissioner for Securities Frank Borger-Gilligan. “We encourage Tennesseans to always do their research before committing their resources. The same red flags of fraud that apply to traditional investments also apply to online investments in binary options.”

Some binary options are listed on a registered exchange or traded on a designated market regulated by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  However, much of the binary options market operates through online trading platforms that are unregulated and often fraudulent. 

Typically, a binary options online trading platform will ask a customer for an initial deposit to open a trading account.  Though there are legitimate binary options markets, a fraudulent company will often entice a customer to open an account with promises of guaranteed returns or by overstating  the average return on investments.  After this initial deposit, a “broker” from the fraudulent company will often contact the customer to inform them of a time-sensitive “guaranteed” investment which will require an additional deposit.   Some accounts may even appear to have actually increased in value as a result of successful predictions.  However, when the customer attempts to later withdraw their initial deposit and any returns, their accounts are cancelled and their calls and emails are ignored.

Additionally, some binary options trading platforms may be operating as unregistered broker-dealers.  Unless an exemption applies, a person who engages in the business of effecting securities transactions for the accounts of others must be registered with the SEC and in each state where he or she conducts business.  If there is no registration or exemption, the offer or sale of the binary options could be illegal.    

When considering investing in binary options or in more traditional investments, the Securities Division offers the following advice:

  • Avoid investments that offer guaranteed or unusually high returns with little or no risk.
  • Be wary of anyone using high pressure sales tactics.
  • Exercise caution with any “tax-free” offshore investment opportunities.
  • Do not invest in anything that you do not fully understand. 

Always check with the Tennessee Securities Division to verify that the securities, and the individuals offering the securities, are registered. 

If you suspect that you might be a victim of a binary options scheme, or you would like to verify whether a binary options online trading platform is registered, please contact the Tennessee Securities Division at (615) 741-2947.