Australia banning Binary options and reducing CFD leverage

#1

Looks like Australia is finally banning binary options trading followed by UK earlier this year. CFD’s will most likely continue but with much lesser leverage than before.

Ideally, like SEBI, these regulators shouldn’t have allowed something like binary options in the first place. Today so many of these companies keep enticing people to trade and make a quick buck.

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#2

@nithin

Why can’t exchanges all over the world provide CFDs?

#3

Exchanges hate CFD’s, it goes against their business model of having centralized transactions. These are all traded OTC and not on the exchange.

CFDs are mostly closed loop platforms. Which means when you take a trade, the platform is the counter party to your trade mostly. Which means there is no underlying exchange to which your orders are sent. So the platform earns, if you lose (in addition to the trading costs).

Since they aren’t regulated, they continuously try to push leverage to ensure you lose faster, and generally since the platform is incentivized to make you lose, best stay away.

CFD’s are popular in many countries as one platform can give them access to trade almost everything that moves around the world. But as you would have guessed by now, they will never be offered by the exchanges.

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#4

My friend is doing code as freelancer for one of the binary trading app.
He was working on a module where they will create false spike in the price to hit the stoploss of the clients who are in profits.

These apps are big scam and its not regulated. You can never will them.

#5

Why isn’t trading binary option or CFD in these brokers termed as gambling or casino app.
Also what’s the major difference between contracts such as Credit default swaps and these CFDs . I think that big banks and Hedge funds actively trade in them. Is it because they are regulated and covered by ISDA.

#6

The most important objective as a regulator is to keep retail investors interest in mind, not let them get tempted and trapped into something they don’t understand. When it comes to Hedge funds, Banks, etc, I guess they assume that people will trade in products they understand.

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#7

Hey @nithin,

Thanks for the details, but the basic question still remain unanswered : Why can’t the exchange provide these products on their own platforms, and regulate them?

Whenever anything is banned (financial products, gambling, alcohol, or anything), it leads to the emergence of a new unregulated market which is far worse.

Why are exchanges not introducing these Binary Options and CFDs on their own?

Thanks

#8

I think binary options are just for gamblers providing no utility to capital markets and exchanges can’t promote it.
Trading in futures is one kind of CFD which investors can use.

#9

It may not be correct to say that they are only for gamblers.
Compared to plain-vanilla call and put options which have a variable payout, binary options provide a fixed payout, and are far better for offering hedging and better capital management.

Possibly @nithin can shed more light.

#10

Exchange is a destination where buyer and seller meet and transact. In case of CFD and Binary options, there aren’t two people, one side is the company offering the product and other side is the client. So this doesn’t fit into an exchange structure.

#11

Hmm… hedging? :slight_smile:

Check this out with example

#12

What could be the real-world non-speculative use for Binary Options?

What I mean is the usual Futures/Forwards/Options has real-world non-speculative use in commodities market and were being used even before the modern exchanges etc.

A quick search on Google did not yield any pointers to this.

#13

There is no real use for it other than making the platform you trade on some money. Binary options is lying playing the roulette or buying a lottery ticket. Atleast in lotteries your payoffs are extremely high, so if you get lucky once, you can end up making money.

In case of Binary, you have to keep getting lucky as the payoffs are never huge for being right once.

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