Signaling rising concern over “all-or-nothing options,” the U.S. Commodity Futures Trading Commission (“CFTC”) filed a civil complaint last week against Banc de Binary for violating “the Commission’s ban on trading options off-exchange.” CFTC v. Banc de Binary, Case No. 2:13-cv-00992-MMD-VCF (D. Nev. filed June 5, 2013).
According to the CFTC, Banc de Binary allows customers to open and fund accounts through their website and then “execute trades by selecting a particular asset on the website and predicting if that asset’s current price will go up or down on a date and time certain.”
Like most proposition bets, binary options have an all-or-nothing payout structure depending on the outcome of a yes/no proposition. The SEC Complaint explains that Banc de Binary customers could, for example, buy a binary option tied to the stock price of XYZ, Inc., which would pay out if XYZ’s stock price rose by some fixed amount within a fixed time period. If the option conditions are not satisfied, then Banc de Binary keeps the purchase price.
The CFTC alleges that Banc de Binary enables, solicits, and encourages customers to speculate on the price of commodities such as wheat, oil, gold, platinum, sugar, coffee, and corn, as well as foreign currencies and stock indices. The Securities and Exchange Commission (“SEC”) filed a separate lawsuit charging that Banc de Binary is an unregistered broker-dealer and that its binary options “are securities under the federal securities laws.” SEC v. Banc de Binary, Case No. 2:13-cv-00993 (D. Nev. filed June 5, 2013).
The regulators are seeking statutory penalties, restitution, disgorgement, rescission, and to permanently enjoin the company from further operations while in violation of federal securities and commodity trading laws. The regulator suits are limited to Banc de Binary’s U.S. activities.
In last week’s “Investor Alert” issued jointly by the CTFC and SEC, regulators voiced their concern that “[m]uch of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in [other] illegal activity” such as fraud and identity theft. The Investor Alert served “to warn investors about fraudulent promotion schemes involving binary options and binary options trading platforms.”
Banc de Binary describes itself as “the largest global provider of binary options.” The company hails from Israel and Cyprus and is regulated by the Cyprus Securities and Exchange Commission. According to the company website, Banc de Binary “is registered with regulatory authorities” in 29 countries. In the wake of the U.S. lawsuits, Banc de Binary was reported as saying that the CFTC was “moving to protect their own interests [in Nadex] and to monopolize an industry that generates an enormous amount of revenue.” Nadex is currently the only binary trading exchange in the U.S. subject to official CFTC oversight.
Last week’s lawsuits against Banc de Binary follow the CFTC’s complaint last November against Trade Exch. Network Ltd., operator of the once-popular prediction market, Intrade. CFTC v. Trade Exch. Network Ltd., Case No. 1:12-cv-01902 (D.D.C. filed Nov. 26, 2012). The Intrade complaint also alleges off-exchange trading. The discovery phase of the Intrade litigation is scheduled to begin this summer.