Binary options trading has gained popularity among some traders, with more brokers offering it. However, it lacks regulation and oversight that protect traders from manipulative practices, and there is widescale fraud in the industry. Binary options also have features that may not make them the best instrument to profit from price movements.
This article will explore these issues concerning binary options trading in Bangladesh, examining its legality and the pros and cons.
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Key Facts on Binary Options Trading in Bangladesh
Binary options are a financial instrument that allows traders to bet on the price direction of an asset. I like to think of binary options as a simplified version of traditional Call and Put options. Let’s see how binary options work:
- Directional Bet: Binary options bet on either the price going up or down over a specific period.
- Time-based bet or price level bet: Some binary option contracts bet on the asset's price moving up or down over the period, and others bet on the price being above or below a specific price level (known as the strike price) at the time of the option’s expiration.
- Short-term nature: Binary options are usually short-term, starting as low as expiration five minutes from the current time to one week away. Most binary options trading is at the shorter end of the available expirations, e.g., betting on a price movement five minutes to a few hours from the current time.
- Fixed risk and payouts: The payout is often fixed when the trade is opened, and the risk is the value of the contract. Binary options are called “binary” because they have two distinct fixed results.
- Assets: Binary options cover a range of underlying markets, including Forex, stock indices, cryptocurrencies, and commodities.
Are Binary Options Legal and Regulated in Bangladesh?
Neither the Bangladeshi government nor the Bangladesh Securities and Exchange Commission (BSEC) has issued specific regulations that outright ban binary options trading.
They have also not created a regulatory framework or licensed binary options firms to operate onshore in Bangladesh. Therefore, Bangladeshi traders will not find firms operating in Bangladesh under BSEC authorization.
So, binary options are not illegal, but they are not regulated. For that reason, they are in a grey area from a regulatory standpoint.
Traders wanting to trade binary options must look for overseas brokers. This carries risks, particularly given binary options are mostly unregulated—if client money is mishandled or there is a dispute, BSEC or any other Bangladeshi authority cannot help.
Importantly, BSEC or other governing bodies have not pursued actions against Bangladeshis that trade binary options.
Simply put, the best Forex brokers in Bangladesh want nothing to do with binary options.
Binary Trading—Pros and Cons
Pros
- Binary options offer a much-simplified method of betting on market directions. You can learn their structure in under an hour and immediately make bets.
Unfortunately, the above item is the only positive aspect of binary options. Other positive elements, such as not needing much money to start binary options trading or being able to open an account quickly, are valid for many other markets and brokers, e.g., Forex and CFD brokers etc.
Cons
- There is large-scale fraud and market manipulation in the binary options industry. Many binary options brokers have been fined, shut down, and their owners sent to jail for fraud. The U.S. Securities and Exchange Commission has recorded binary options fraud in three categories:
i. Software manipulation to generate losing trades. Binary options platforms manipulate the software to distort prices and payouts. For example, when a customer’s trade is winning, the countdown to expiration is arbitrarily extended until the trade becomes a loss.
ii. Brokers refuse to credit customer accounts or reimburse funds to customers. For example, when customers later attempt to withdraw deposits or profits, the brokers cancel customers’ withdrawal requests, refuse to credit their accounts, or ignore their calls and emails.
iii. Identity theft. Binary options brokers fraudulently use or sell customer information, including copies of customer credit cards, passports, and driver’s licenses.
2. Many jurisdictions have banned binary options. Binary options are prohibited in Europe, Australia, Canada, and the UK. These countries' regulators, amongst the most reputable in the world, have banned them because they are too risky and because brokers can too easily manipulate the binary options market. Remember, there is no central exchange or oversite for binary options. The brokers effectively price the markets themselves.
3. Binary options pricing typically has negative reward/risk ratios. The reward for a profitable trade is less than the risk if the trade does not work out. Successful traders and millionaire traders almost always build their trading on the back of the opposite equation: a positive reward/risk ratio, i.e., risking less to gain more. For example, when I enter a Forex trade, I may have a stop-loss of 50 pips and a target of 100 pips, i.e. a 2:1 reward/risk ratio. Even If I am right half the time, I still make money. The issue with a negative reward/risk ratio is that I rely on high win rates, and it also takes more winners to compensate for a series of losers. That leads to deeper and longer drawdowns. A positive reward/risk ratio is foundational to profitable and sustainable trading and is one of the first things traders should learn and respect.
4. Binary options brokers typically only offer access to a handful of markets. This limits opportunities.
5. Binary options are not halal. For Muslim traders wishing to observe Shariah financial principles, binary options do not fit the criteria for halal instruments—their pricing and payouts do not match the true price movements of the underlying market, and binary options do not facilitate any movement of assets. Binary options are more like a casino for betting on outcomes.
6. Binary options will not make you a better trader. Trading regular markets involves placing stop-losses, finding profit targets, paying attention to reward/risk ratios, moving stop-losses, or scaling out of trades as the price moves. It can also mean allowing short-term positions to turn into longer-term trades if the market conditions allow. Binary options do not allow you to acquire those skill sets.
Conclusion
I cannot say this strongly enough—stay away from binary options.
Countries with some of the world’s leading regulatory bodies have banned binary options altogether because they consider them a combination of such high-risk and fraudulent practices. This includes the entire European Union through the European Securities and Markets Authority (ESMA), Australia, the UK, and Canada. Furthermore, the U.S. Securities and Exchange Commission (SEC) has a section on its website dedicated to staying away from binary options. The SEC has also prosecuted fraud in the industry.
Even if you think you have found a reputable binary options platform, the maths does not work out to make it a worthwhile pursuit. Most binary options contracts have negative rewards/risk ratios or unrealistic price targets. The fixed nature of their payouts means their values do not correlate to the actual price movements of the underlying assets. I would go so far as to say they make people worse traders because they give a false view of the markets.
For Bangladeshi Muslims, it’s worth noting that most Islamic scholars view binary options as haram.
Binary options are essentially a casino for the markets. There are much better ways to trade.
