Shares in financial spread betting firms continued to fall on Monday after being dealt a blow before Christmas by the European Union’s (EU) securities watchdog on Friday, which said it might curb core parts of the market under sweeping new product powers from January.
The European Securities and Markets Authority (ESMA) said it was considering prohibiting the marketing, distribution or sale of binary options to retail clients, and restricting the marketing, distribution or sale to retail clients of contracts for differences (CFD), including rolling spot Forex.
It will consult in January on whether to push ahead with such measures.
Shares in London-listed spread betting firms plunged on the news. Plus500 fell more than 17 per cent; CMC Markets was down nearly 14 per cent in early trading and IG Group lost more than 12 per cent on Friday alone.
Binary options are the most under threat here. They are fairly simple to understand.
I make a gamble that the FTSE 100 is going to rally for the rest of the day and will remain above 7,500 30 minutes from now and place a call (bet) to that effect. If, come 30 minutes later, the FTSE 100 is still above 7,500 I win 70% of my original investment on top of my original stake.
If it falls below 7,500 I lose everything.
It’s not exactly hard to see why European regulators have taken an interest in the spread betting market though. In fact, the Financial Conduct Authority (FCA) itself recently announced it would regulate binary options for the first time from January.
It has also warned previously that a majority of consumers lose money on binary options - otherwise known as all or nothing bets - and there have been a reported 2,605 victims who, collectively, are believed to have lost £59.4 million on binary options since 2012.
The FCA will take over the regulation of binary options from the Gambling Commission from 3 January 2018. But the move by the ESMA, while it shouldn’t come as a huge surprise, does limit, if not pretty much entirely close down, the binary options market.
While not yet banned in the US, the Federal Bureau of Investigations (FBI) estimates fraudsters steal $10 billion annually worldwide using binary options. It is unlikely to be long before the Securities and Exchanges Commission (SEC) follows the example set by its British and European peers.
That leaves a question however: If something is being exploited for illegal purposes why not just make it illegal?
Equally, do financial regulators need to get involved in spread betting?
Don’t most people that have spread betting accounts understand the risks they are taking?
Don’t most gamblers that walk into their high street bookies understand the chances they are taking?
Don’t most people that play the lottery know how remote the odds of their winning the jackpot are?
If, and admittedly it’s a big if, people understand the risks, shouldn't they be able to spend their money as they see fit?
Most people that have active spread betting accounts have them because the earned income from spread betting is tax free. HM Revenue & Customs believe spread betting to be so volatile that it is no different to trying to bet on the outcome of a horse race. The sheer fact that binary options are currently regulated by the Gambling Commission should, by itself, be a giveaway. Not to mention the fact that by its very name spread betting should be pretty clearly understood for what it is.
What about all those people currently “investing” in Bitcoin? Aren't they taking similar risks?