CME’s Event Contracts: Are Binary Options Back?

Binary options are notoriously controversial in several jurisdictions. These trading instruments are banned in the United Kingdom, European Union, Canada and Australia, which was the latest one to impasse a ban, and even Israel, which was previously home to many binary options platforms.

However, the United States, which has one of the strictest regulated financial markets and does not even allow CFD trading, permits companies to offer binary options contracts in a highly regulated environment.

Recently, CME Group, which operates one of the largest derivatives exchanges announced the upcoming launch of binary options-styled contracts. CME’s instruments are branded as event contracts: they enable traders to simply predict the price of a futures market, whether it “will move up or down by the end of each day's trading session.”

They will be small contracts, with a value of up to $20 per contract. But, traders will be able to buy multiple contracts at once, up to 250 contracts at a time. The US regulator is still reviewing CME’s event contracts.

What Are Binary Options?

Binary contracts became popular among traders because of their simplicity. These contracts only want traders to predict if the price of an instrument will go up or down within a short period, let it be a few hours, minutes or even seconds.

They can be easily understood by even rookie traders and provide fixed returns, irrespective of points increase or decrease in the value of the underlying asset.

With the growing popularity of such contracts among inexperienced retail traders, the market was swamped by fraudsters. According to data published in 2018 by Action Fraud, when the UK allowed binary options trading, traders lost £87,410 to binary options fraud every day.

Most of the fraudulent platforms manipulated the market data provided to the traders and profited from the ignorant traders’ losses.

“The CFDs and binary options prohibited in the EU and UK are not the same as the contracts we are launching for market participants in the U.S. While CFDs and binary options in the UK and Europe settle to prices determined by their brokers, CME Group event contracts will settle based on a regulated futures market with transparent prices,” a CME spokesperson told Finance Magnates.

The Crackdown

The ban against binary options in most jurisdictions was carried out in the second half of the 2010s. Israel, which became the den of most binary options fraudsters, became the first country to domestically ban such instruments in 2016 and extended the overseas sale in the following year.

“Beyond the severe economic harm to citizens around the world, marketers of binary options are increasingly causing reputational damage and inflaming anti-Semitism towards Jews and Israelis,” Shmuel Hauser, who was the Chair of the Israel Securities Authority during the ban, said.

The European position was led by Belgium, which also banned binary options in 2016. The European Securities and Markets Authority prohibited the marketing, distribution or sale of binary options to retail clients in July 2018 prompting other regulators in the continent to take such steps.

The regulatory action against binary options was not confined to Europe and Israel as Canada additionally banned binary options in 2017 with an expiry shorter than 30 days. Australia was the latest in the pack to ban the retail sale of binary options in May 2021, which will be effective until 7 October 2022.

The Australian financial market supervisor, ASIC ASIC The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the Read this Term, revealed that in the 13 months before the ban was imposed, between 74 percent and 77 percent of the retail clients lost money while trading the speculative binary options. Further, the net losses from trading these instruments mounted to AU$15.7 million compared with AU$1.7 million in total net profits. None of the retail Aussie clients has made any losses (or profits) from trading binary options with licensed issuers since the product intervention order took effect.

However, the regulator pointed out that 68 percent of the wholesale Aussie clients still made losses from trading binary options in the period as the imposed ban does not apply to them.

Now, ASIC wants to extend this retail binary options ban until 1 October 2031.

“Binary options themselves aren't necessarily a harmful or deceptive product, it was that they were being promoted by a lot of unscrupulous gambling companies,” Quinn Perrott, the Co-CEO of TRAction Fintech, said. “As these were licensed under similar terms as CFDs they were only available to retail clients from EU or AU brokers, not US brokers, hence there being no need to ban them previously.”

In addition, he pointed out that: “as a product to trade, [binary options] are inherently no more like gambling than any other derivative or option, as long as they are provided under fair terms and fair execution Execution Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Read this Term by reputable derivatives issuers.”

CME’s Move into the Binary Options Market

The US is one of the few markets where trading binary options is still allowed. However, the regulations in the country are too tough, allowing only one regulated platform, Nadex (owned by Crypto.com), to offer binary options.

Now, the CME Group’s entrance into the market with its 'event contracts' might change the shift of this controversial, yet in-demand, binary options market.

“US consumers are increasingly savvy about their investments and finances, and increasingly looking for new tools and the ability to access new markets,” the CME revealed, and its new product came as “part of serving a market need.”

Further, the exchange has been focusing on the retail markets for a while now. It has introduced several micro contracts of larger benchmark contracts, covering bonds, commodities and even cryptocurrencies.

“We have been focused on continuing to develop our cross-asset suite of micro-sized products, designed to provide choice in the right size for diverse market participants, including active retail traders looking for cost-efficient exposure to these asset classes on a regulated exchange,” the CME spokesperson added.

The bet of the CME in the retail trading space paid off as more than 341,000 retail traders were active in its markets through June 2022, which is a yearly jump of 6.2 percent. Out of the total, the exchange onboarded over 91,000 new traders to these markets.

Further, the retail average daily volume (ADV) on the CME grew to 1.5 million contracts per day during the first six months of 2022, which is an increase of 41 percent year-over-year.

“Building on the success of our micros and in response to continued demand from retail participants who want to access to our benchmark products in some of the most recognized markets in the world, we are launching these new event contracts,” said the CME spokesperson.

Is CME’s Entrance Going to Change Binary Options Industry?

CME’s rebranded binary contracts will be unlike any of such contracts offered by fraudsters based in Israel or shady offshore entities. The exchange elaborated that: “each even contract will be fully collateralized, with limited risk, meaning investors can choose their maximum profit or loss (of up to $20) when they make the trade.”

Despite the reputation of CME, the image of binary options is tainted. When it comes to retail trading, these products are extremely risky, and fraudsters made the situation worse. And at a time when regulators in Europe and Australia are cracking down on aggressive marketing by legitimate platforms and prioritizing safety, the chances of allowing binary options again are very grim.

“I think it will have a long way to go, but it will at least do something to remove the stigma,” Perrott said on the CME’s upcoming event contracts. “Perhaps [binary options] will be allowed for institutional clients, but I can’t see the FCA, CySEC for ASIC ever reversing their rulings when it comes to retail clients.”