Analysis: What is the Future of the Binary Options Industry Without Bonuses

The ESMA has recently updated its Q&A on bonus practices - how is the industry going to tackle the new

A couple of weeks ago, the unexpected but not entirely surprising news that the European Securities Markets Authority (ESMA) has dedicated a section of its Q&A to the practice of awarding bonuses to clients hit the wires. The bonus requirements designed to encourage clients to trade more were the target and it is now time to elaborate on the sustainability of the industry in this new environment.

At the dawn of the binary options industry, brokerages attracted new clients via aggressive bonus promotions. The strategy paid off rather well and the industry took off, albeit without regulation. Clients had to commit to some strict bonus conditions which included trading 20-30 times the value of the bonus in order to be able to withdraw the funds.

The mathematical probability of withdrawing funds from trading accounts was close to zero

The mathematical probability of withdrawing bonus funds from trading accounts was calculated as being close to zero. Clients would have needed to achieve incredible accuracy in order to be able to withdraw their bonuses. Clients were informed about the requirements, but only after they asked.

Regulation and maturity of the binary options bonus system

With regulation came responsibility and new growth opportunities. The chief regulator of the binary options industry both then and now, the Cyprus Securities and Exchange Commission (CySEC), has not been very keen to supervise bonus promotions and binary and forex brokerages continued to employ the strategy. Clients became better informed with more visible bonus conditions, but that still wasn’t enough to eliminate unpleasant surprises for traders and later for brokers.

The French financial regulator has become the first financial regulator in Europe to organize a binary and forex ‘mystery shopper’ campaign

Some brokers operating in France have been particularly aggressive, sometimes promising up to five times the amount of a client’s deposit in order to attract more traders. However, as increasing numbers of clients lose all of the money in their bonus-augmented accounts, complaints to local and European financial regulators have been rising drastically.

With France being the most affected country, its regulators have been more active on the scene and have been the most proactive regulatory authority in Europe. When it comes to warning clients about unregulated brokers, the Autorité des Marchés Financiers (AMF) has compiled a list, and for regulated brokers, the authority has become the first financial regulator in Europe to organize a ‘mystery shopper’ campaign.

People that have opened accounts for trading forex and/or binary with Cypriot brokers have been having enormous difficulties in getting their money back. The alarm bells were ringing, and very few, if any, brokers were listening.

Bonus ban across the European Union

Recently, ESMA published a guideline that mandated national regulators to scrap the deposit bonus system, effectively killing the most powerful tool of the regulated binary options brokerages to attract clients. With the news rapidly affecting brokers, we have seen multiple layoffs across the industry.

Some have complied, others have complied and opened unregulated brands to transfer their clients there and a minority has started strictly complying with the new regulation and restricting bonuses for European clients, while leaving the door open for clients from outside of the EU.

Will brokers be able to onboard enough clients without bonuses?

The elephant in the room for the binary options industry is how to onboard clients without promising that they can double their money if they deposit funds. If the requirement to turn over the deposit bonus 20-30 times is void, then the traders might start winning more. With current client acquisition costs being substantial, that part of the binary options industry that targets European clients might need to reconsider its focus.

New methods of retention and engagement need to be implemented quickly for all brokerages that are keen to survive in this rapidly contracting industry when it comes to Europe. The biggest binary options trading brokers have a big advantage and the smaller white labels need access to quality leads outside of the EU in order to be profitable.

What about the future for the binary options industry?

We know that the binary options industry is greatly challenged when it comes to the current regulatory status quo in Europe. While brokers that have been used to substantial profits over the years are restructuring their operations and looking for new methods to acquire and retain clients, there is room for new industry players with innovative ideas on how to onboard clients.

The ban on bonuses will be the demise of the brokers that can’t adapt to the new conditions and the revival of competition when it comes to new ideas regarding marketing binary options to European clients. With the bulk of the industry relying on this market to onboard, the main difficulty will be compliance.

Some of the first technology providers in the industry have already announced that they are switching to an exchange traded model. But the regulators will take their time to examine the new products and will likely closely supervise the execution of client orders in line with the looming MiFID II regulation in January 2018.

All said and done, the new regulatory framework will bring both new winners and losers to the binary options space. The eternal battle between financial regulators and financial services providers to outsmart each other will continue and we will see a new generation of products that need to ensure the fair treatment of traders and brokers alike.

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