SINGAPORE: The Monetary Authority of Singapore (MAS) on Tuesday (Mar 14) warned investors on the risks of trading binary options with unregulated platforms, after an increase in the number of complaints from investors who suffered losses from such investments.
A binary option is a type of option contract that references an underlying instrument such as stocks, commodities, currencies and interest rates. Unregulated platform providers often use marketing catchphrases such as “trading with zero risk”, “trading amounts of as little as $1” and “profit payout of 500% per trade”, to entice investors to invest.
“Contrary to promises of low investment risks with exceptionally high returns, binary options are in fact, speculative and risky investment instruments,” the central bank said.
“There is a high chance of the investor losing his entire investment amount, whether the investor deals with a regulated or unregulated entity. Further, an investor is always exposed to investment risk, whether a product is regulated or not.”
Many of the unregulated binary options trading platforms are fraudulent and based outside Singapore, MAS said, adding that investors who trade with these platforms are unlikely to recover any money lost and will not have access to avenues for dispute resolution.
"Before making any investment decisions, investors should think carefully about the claims being made about the products offered – if the touted ease of making significant profits sounds too good to be true, it probably is," the central bank said.
While options are often used by professional investors for hedging purposes, NUS Business School, Finance Department head, Associate Professor Robert Kimmel said most retail investors are “effectively speculating and probably hoping to make unrealistically high rates of return in a short period of time.”
“Maybe some people will become very rich in a short period of time,” Assoc Prof Kimmel said, “But others will lose all of their money because these are inherently very risky investments.”
Law experts said the warnings come amid growing concern globally over the legitimacy of such unregulated binary options trading platforms being used as vehicles to commit fraud.
In the United States, the Federal Bureau of Investigation (FBI) issued a warning to the public on Mar 13 of three broad categories of fraud – refusal to credit customer accounts or reimburse funds to customers, identity theft, and manipulation of trading software.
For investors who have made financial losses with these unregulated platforms, it is an “uphill task” to get monetary compensation, said RHTLaw Taylor Wessing partner Nizam Ismail.
While dispute resolution mechanisms exist for regulated financial institutions, Mr Ismail said those safeguards do not extend to unregulated players.
“To begin with, is there a person you can ascribe liability to? Do you even know who runs the platform?” Mr Ismail asked. “Even if there is criminal behavior involved, who are you lodging the complaint against?”
Last December, Singapore police warned of a “sharp rise” in scams involving online trading in binary options, with more than 30 reports lodged by investors who had lost more than S$1 million to unregulated binary option investments.