Investor Assistance (800) 732-0330 www.investor.gov

Investor Alert

Binary options and Fraud 

The SEC’s Office of Investor Education and Advocacy and 

the Commodity Futures Trading Commission’s Office of 

Consumer Outreach (CFTC) are issuing this Investor Alert 

to warn investors about fraudulent promotion schemes 

involving binary options and binary options trading 

platforms. These schemes allegedly involve, among other 

things, the refusal to credit customer accounts or reimburse 

funds to customers, identity theft, and manipulation of 

software to generate losing trades.

Binary Options

Binary options differ from more conventional options 

in significant ways. A binary option is a type of options 

contract in which the payout will depend entirely on 

the outcome of a yes/no proposition.

The yes/no proposition typically relates to whether 

the price of a particular asset that underlies the binary 

option will rise above or fall below a specified amount. 

For example, the yes/no proposition connected to the 

binary option might be something as straightforward 

as whether the stock price of XYZ company will be 

above $9.36 per share at 2:30 pm on a particular day, 

or whether the price of silver will be above $33.40 per 

ounce at 11:17 am on a particular day. once the option 

holder acquires a binary option, there is no further 

decision for the holder to make as to whether or not 

to exercise the binary option because binary options 

exercise automatically. Unlike other types of options, 

a binary option does not give the holder the right to 

purchase or sell the underlying asset. When the binary 

option expires, the option holder will receive either a 

pre-determined amount of cash or nothing at all. Given 

the all-or-nothing payout structure, binary options are 

sometimes referred to as “all-or-nothing options” or 

“fixed-return options.”

Binary Options Trading Platforms

some binary options are listed on registered exchanges 

or traded on a designated contract market that are 

subject to oversight by United states regulators such 

as the seC or CFtC, respectively, but this is only a 

portion of the binary options market. Much of the 

binary options market operates through Internet-based 

trading platforms that are not necessarily complying 

with applicable U.s. regulatory requirements. The 

number of Internet-based trading platforms that offer 

the opportunity to purchase and trade binary options 

has surged in recent years. The increase in the number 

of these platforms has resulted in an increase in the 

number of complaints about fraudulent promotion 

schemes involving binary options trading platforms.

Much 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 illegal activity.
Investor Assistance (800) 732-0330 www.investor.gov

typically, a binary options Internet-based trading 

platform will ask a customer to deposit a sum of money 

to buy a binary option call or put contract. For example, 

a customer may be asked to pay $50 for a binary option 

contract that promises a 50% return if the stock price 

of XYZ company is above $5 per share when the 

option expires. 

If the outcome of the yes/no proposition (in this case, 

that the share price of XYZ company will be above 

$5 per share at the specified time) is satisfied and the 

customer is entitled to receive the promised return, the 

binary option is said to expire “in the money.” If, however, 

the outcome of the yes/no proposition is not satisfied, 

the binary option is said to expire “out of the money,” 

and the customer may lose the entire deposited sum. 

There are variations of binary option contracts in which 

a binary option that expires out of the money may entitle 

the customer to receive a refund of some small portion of 

the deposit—for example, 5%—but that is not typically 

the case.

In fact, some binary options Internet-based trading platforms may overstate the average return on investment by 

advertising a higher average return on investment than a 

customer should expect, given the payout structure. For 

instance, in the example above, assuming a 50/50 chance 

of winning, the payout structure has been designed in 

such a way that the expected return on investment is 

actually negative, resulting in a net loss to the customer. 

This is because the consequence if the option expires out 

of the money (approximately a 100% loss) significantly 

outweighs the payout if the option expires in the money 

(approximately a 50% gain). In other words, in the 

example above, an investor could expect, on average, 

to lose money.

Investor Complaints Relating to 

Platforms

Fraudulent Binary Options Trading 

The seC and CFtC have received numerous complaints 

of fraud associated with websites that offer an opportunity 

to buy or trade binary options through Internet-based 

trading platforms. The complaints fall into at least three 

categories: refusal to credit customer accounts or reimburse 

funds to customers; identity theft; and manipulation of 

software to generate losing trades.

The first category of alleged fraud involves the refusal of 

certain Internet-based binary options trading platforms 

to credit customer accounts or reimburse funds after 

accepting customer money. These complaints typically 

involve customers who have deposited money into 

their binary options trading account and who are then 

encouraged by “brokers” over the telephone to deposit 

additional funds into the customer account. When 

customers later attempt to withdraw their original 

deposit or the return they have been promised, the 

trading platforms allegedly cancel customers’ withdrawal 

requests, refuse to credit their accounts, or ignore their 

telephone calls and emails.

The second category of alleged fraud involves identity 

theft. For example, some complaints allege that certain 

Internet-based binary options trading platforms may 

be collecting customer information such as credit card 

and driver’s license data for unspecified uses. If a binary 

options Internet-based trading platform requests 

photocopies of your credit card, driver’s license, or 

other personal data, do not provide the information.

The third category of alleged fraud involves the 

manipulation of the binary options trading software 

to generate losing trades. These complaints allege that 

the Internet-based binary options trading platforms 

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Investor Assistance (800) 732-0330 www.investor.gov

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manipulate the trading software to distort binary options 

prices and payouts. For example, when a customer’s 

trade is “winning,” the countdown to expiration is 

extended arbitrarily until the trade becomes a loss.

Unregistered Transactions, Operations, 

Broker-Dealers, or Trading Exchanges; 

Illegal Options Transactions

In addition to ongoing fraudulent activity, many binary 

options trading platforms may be operating in violation 

of other applicable laws and regulations, including certain 

registration and regulatory requirements of the SEC and 

CFTC, as described below.

Certain Registration and Regulatory 

Requirements of the SEC

For example, some binary options may be securities. 

Under the federal securities laws, a company may not 

lawfully offer or sell securities unless the offer and sale 

have been registered with the SEC or an exemption from 

such registration applies. For example, if the terms of 

a binary option contract provide for a specified return 

based on the price of a company’s securities, the binary 

option contract is a security and may not be offered or 

sold without registration, unless an exemption from 

registration is available. If there is no registration or 

exemption, then the offer or sale of the binary option 

to you would be illegal.

If any of the products offered by binary options trading 

platforms are security-based swaps, additional requirements will apply.

In addition, some binary options trading platforms 

may be operating as unregistered broker-dealers. A 

person who engages in the business of effecting securities transactions for the accounts of others in the U.S. 

generally must register with the SEC as a broker-dealer. 

If a binary options trading platform is offering to buy 

or sell securities, effecting transactions in securities, 

and/or receiving transaction-based compensation (such 

as commissions), it likely should be registered with 

the SEC. To determine whether a particular trading 

platform is registered with the SEC as a broker-dealer, 

visit the FINRA BrokerCheck website (www.finra.org/

investors/toolscalculators/brokercheck/).

Some binary options trading platforms may also be 

operating as unregistered securities exchanges. This 

would be the case if they matched orders in securities 

of multiple buyers and sellers using established nondiscretionary methods. However, there are cases where 

a registered broker-dealer with a trading system or 

platform may legitimately have no obligation to register 

as an exchange.

Certain Registration and Regulatory 

Requirements of the CFTC

It is illegal for entities to solicit, accept offers, offer 

to or enter into commodity options transactions (for 

example, foreign currencies, metals such as gold and 

silver, and agricultural products such as wheat or corn) 

with U.S. citizens, unless those options transactions are 

conducted on a designated contract market, an exempt 

board of trade, or a bona fide foreign board of trade, 

or are conducted with U.S. customers who have a net 

worth that exceeds $5 million.

To see the most recent list of exchanges that are designated

as contract markets, check the CFTC website. There 

currently are only three designated contract markets 

offering binary options in the U.S.: Cantor Exchange 

LP; Chicago Mercantile Exchange, Inc.; and the North 

American Derivatives Exchange, Inc. All other entities 

offering binary options that are commodity options 

transactions are doing so illegally.
Investor Assistance (800) 732-0330 www.investor.gov

4

Further, entities that solicit or accept orders for 

commodity options transactions and accept, among 

other things, money to margin, guarantee, or secure 

the commodity options transactions must register as a 

Futures Commission Merchant. Entities that act as 

the counterparty (that is, they take the other side of the 

transaction from the customer as opposed to matching 

orders) for foreign currency options transactions for 

customers with a net worth of less than $5 million 

must register as a Retail Foreign Exchange Dealer.

■ 

■ 

■ 

■ 

Because of their lack of compliance with applicable

laws, if you purchase binary options offered by 

persons or entities that are not registered with or 

subject to the oversight of a U.S. regulator, you 

may not have the full benefit of the safeguards 

of the federal securities and commodities laws 

that have been put in place to protect investors, 

as some safeguards and remedies are available 

only in the context of registered offerings. In 

addition, individual investors may not be able 

to pursue, on their own, some remedies that are 

available for unregistered offerings.

Final Words

■ Remember—much 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 illegal activity.

■ Do not invest in something that you do not understand. If you cannot explain the investment opportunity in a few words and in an understandable way, 

you may need to reconsider the potential investment.

■ Before investing in binary options, you should take 

the following precautions:

Check to see if the binary options trading 

platform has registered the offer and sale of the 

product with the SEC. Registration provides 

investors access to key information about the 

terms of the product being offered. You can 

use EDGAR (www.sec.gov/edgar/searchedgar/

webusers.htm) to determine whether an issuer 

has registered the offer and sale of a particular 

product with the SEC.

Check to see if the binary options trading 

platform itself is registered as an exchange. To 

determine whether the platform is registered as 

an exchange, you can check the SEC website 

regarding Exchanges at www.sec.gov/divisions/

marketreg/mrexchanges.shtml.

Check to see if the binary options trading 

platform is a designated contract market. To 

determine whether an entity is a designated 

contract market, you can check the CFTC 

website at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic

=TradingOrganizations&implicit=true&type=DC

M&CustomColumnDisplay=TTTTTTTT.

Finally, before investing, check out the registration 

status and background of any firm or financial 

professional you are considering dealing with at 

FINRA BrokerCheck (www.finra.org/investors/tools 

calculators/brokercheck/) and BASIC Search (www.

nfa.futures.org/basicnet), the National Futures Association Background Affiliation Status Information 

Center. If you cannot verify that they are registered, 

don’t trade with them, don’t give them any money, 

and don’t share your personal information with them.
EDGAR (www.sec.gov/edgar/searchedgar/webusers.htm)

FINRA BrokerCheck (www.finra.org/investors/toolscalculators/brokercheck/)

BASIC Search (www.nfa.futures.org/basicnet)

SEC Publication: Ask Questions (www.sec.gov/investor/pubs/sec-questions-investors-should-ask.pdf )

SEC Investor Alert: Social Media and Investing—Avoiding Fraud (www.sec.gov/investor/alerts/socialmedia 

andfraud.pdf )

CFTC Consumer Protection (www.CFTC.gov/consumer protection)

International Organization of Securities Commissions (IOSCO) (www.iosco.org/lists/index.cfm?section=general)

Related Information

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither 

a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application 

of a particular law or rule, please consult with an attorney who specializes in securities law.

SEC Pub. No. 148 (6/13)