Finance Magnates sat down with one of the most important figures in the binary options world, Pini Peter – the founder of leading software developer SpotOption – for an exclusive first interview about the international regulatory landscape.
Long Financial History
The subject that the SpotOption founder most wanted to talk about was the financial nature of binary options. He gave numerous examples of how different authorities determined that they are not gambling products, like the landmark Dutch court ruling from over a year ago, as well as an extensive century-long track record as financial instruments:
“Around the world, the way I read the map, binary options developed very rapidly, more than people in the industry predicted and at a pace I could not have imagined. No one estimated this will be the growth rate, in terms of the amounts of traders, volumes and revenues.” He says that SpotOption, for example, now has a roster of 250 employees in its headquarters alone, mostly programmers, up from 140 personnel last year.
“Now if you read the biography of Rothschild you will see that he made the most of his initial fortune by selling binary options. Decades ago people would come to him to buy options, mainly on the price of gold, over or below – these were binary options.
Binary options trading has existed in the US since 1927. This is a long established industry that just began to suddenly develop since 2007 when NADEX came along. The US decided that binary options is a financial product, it works on exchanges and the CFTC regulates it. In Europe the market for OTC is more developed and these two markets work differently but both consider binary options to be financial instruments.
In Japan there was some uncertainty about binary options but the FFAJ (Financial Futures Association of Japan) make a decision to license it. So the two leading financial regulators in the world, in the US and Japan, consider it financial instruments. There are plenty of binary options firms in Japan now, regulated, and when I read the reports they have to release publicly I see it’s very similar to the results our clients produce. The real P&L in the Japanese market is between 4% to 7%, minus bonuses, this is identical to our brokers. Exactly identical.
So in Japan it is considered a financial instrument and everyone agrees – there is a law and everybody follows it without complaints. In the US – there is a law and everybody follows it without complaints. Let’s look at another regulator: in Australia, ASIC made a decision to license binary options as a financial product.
In the UK, the leading country in Europe for financial trading regulations as well as gambling regulations, because spread betting is under gambling regulations there were some thoughts initially about bringing binary options under the same umbrella. But the FCA declared it’s financial and it will regulate it. As evidence, ETX, and previously Alpari UK, market binary options under their FCA license.
Let’s look at another European regulator: Malta also has a developed financial market with plenty of regulated forex brokers as well as a regulated gambling market. The gambling regulator wanted binary options to be under its jurisdiction but the Maltese financial regulators said not so fast – this is a financial product. And now there are dozens of firms on the way to becoming regulated there.”
Simplicity and competition
The binary options industry seems to be under attack at the moment in certain countries (such as Israel) recently where both some in the media and regulators try to paint brokers as scams or illegal gambling operations. Peter thinks that this is fueled by lobbying of the older industries that binary options disrupted (banks and forex) and that the simple nature of binary options actually makes them far more transparent than other forms of trading.
“This is a simple financial product that anyone can trade. Anyone that could not trade forex because it is too sophisticated – even I can’t trade on MT4 because it is too complex for me – can trade binary options. They make it easy, up or down, 85% payout.
The market developed because people understood that the same way the iPhone and tablets made computing and telecommunication easy, binary options made financial trading easy. And suddenly hundreds of thousands clients moved from trading with the banks and forex brokers, where no one understands anything – but no one understands anything – and it’s not so accessible to simple traders.
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Welcome to the new world of trading – finance needs to be simple. A trader needs to know when he enters a position what can he gain, what he can lose, simply, and there is no product in finance as simple as binary options. You don’t need to calculate anything, everything is displayed in advance. Because the industry developed so fast it started eating the market share from forex brokers and banks. These are very big industries with deep pockets so they started to deploy lobbyists on the regulators and tarnish our good name – as happened in Israel.
Whenever you have a huge industry with lots of clients there will be plenty of complaints. The same way that the mobile phone carriers have hundreds of complaints from different kinds, this huge new industry now also has. Now I know that in percentages of users the rate of complaints is much lower in binary options than for forex brokers, definitely without question.
I don’t know about anyone that made a scam in binary options, but I know about some forex brokers that did. I do know of one binary options company that had its license revoked but all the clients’ money was safe in the bank and they did not run away with billions like what happened in other financial industries.
According to our data, short term options (60 seconds) are much more profitable for traders than long term options, without question. Anyone who has some experience in graph and trend analysis can succeed in this.
You don’t need to be a genius to understand that with opportunity comes risk. But in forex you are definitely subjected to larger risk. You don’t know what you stand to lose, as you do with the transparent and upfront binary option.”
The Rule of CySec and Regulation
Cyprus is among the smallest countries in Europe but it has emerged as the leading jurisdiction for binary options firms to establish their headquarters in. This happened mainly because the Cyprus Securities and Exchange Commission (CySec) was the first regulator in the EU to offer a financial license to brokers with which they can offer services throughout the region via the MIFID passporting agreement. Coincidently, the very first binary firm that CySec licensed was SpotOption back in 2012. This brought many jobs and investments to Cyprus but also recently lead to outside pressures.
“We are in contact with CySec for a very long time now, and we see it is a very responsible regulator. A regulator that dared to regulate binary options when others just made statements but did not follow up with actions. CySec proved they have guts, but they also probably did not predict the growth rate of the industry.
ESMA needs to make sure every regulator in Europe creates regulatory frame work for binary options the same as CySec did. Cyprus is a small country and the whole industry is there because CySec was brave and responsible and created regulations and brought thousands of new jobs to Cyprus. CySec is under pressure because other regulators only said they will regulate binary options but did nothing.
CySec is doing a lot to organize the market and brokers are falling into line. The industry will be streamlined like any other that emerged fast and needed to be regulated. Brokers are changing and becoming more responsible, including in marketing, I can see that personally. CySec is making a lot of moves and hiring a lot of great people and they deserve a lot of respect and admiration for they are doing.
SpotOption controls about 50% of the market for binary options software but our goal is not to grow our market share. Our goals are to mature the industry and get it regulated everywhere. If there is a regulator that complains against a broker we shut it down. We have a strong compliance team to monitor as much as we can brokers that operate in unregulated jurisdictions and we deal swiftly and harshly with clients’ complaints. We have a lot of brokers – over a 100 active worldwide- this is not easy, but I am happy to say that our brokers work legitimately and with integrity. We want quality not quantity.”
In general Peter is very welcoming of regulations on the industry but one approach that he strongly disagrees with is that of the Israeli financial watchdog. The ISA recently made a surprise announcement that it is banning binary options for all types of clients and issued just 30 days for all brokers in Israel to stop offering the service. The Chairman of the ISA even called the market a “dangerous jungle” and said that there are many investment opportunities that disguise themselves as harmless while actually being sharp-toothed predators on the hunt for innocent investors.
Peter feels this is unfair, and undeserved. Yossi Beinart, the current CEO of the Tel Aviv Stock Exchange, was the founder and CEO of Nadex (the US-based retail-focused online binary options exchange). So Peter cannot accept that the ISA is calling binary options gambling after it championed bringing Beinart to the TASE. Peter hopes that with more inspection of the industry, the Israeli regulators will see binary options the way he sees them – legitimate financial instruments that will simplify trading – and open this world to the masses.
“Israel is a very small and insignificant market for binary options, regardless, the principle is disturbing to me. Why should the rest of the world enjoy the opportunities that binary options offer, from a brokerage and end-user perspective, while Israel stays behind on the trading revolution. I hope to see the subject reconsidered. Israeli industry leaders are planning to challenge the ban in the courts if needed.”