Blighted by scams: Why Israel’s FX and binary industry is completely different

What is the career path of the average senior executive within a retail FX company in many established regions of the world?

Most of the time, the polished, educated, articulate and highly experienced management teams of Britain or North America’s renowned companies have been to private school, or at least a very well recognized grammar school, and then completed a degree plus a masters at a top quality university, then completed an internship at a global financial institution such as Morgan Stanley or Goldman Sachs on the technological or trading side, before progressing to middle management.

Once at such a level, the drive is still there, as the executive is young yet experienced, which leads to heading a specific division before then being elected by shareholders to the board of a publicly listed FX company, or a well-respected privately owned firm in which decisions are made by very highly experienced investors and seasoned shareholders.

Quite often, the career paths of senior executives among Britain and America’s FX and electronic trading firms are publicly available and are an instrumental part of the provenance of the companies that they lead.

But not in Israel…..

Israel’s retail FX and binary options industry rose to prominence very very quickly in the middle of the last decade, however there is a vast difference between companies that operate from within Israel, and those which operate in regulated jurisdictions such as Cyprus, Australia, UK and North America.

That difference is that in Israel, institutional FX is all conducted by two major banks – HaPoalim and Leumi, and most retail traders also trade stocks and equities via these two banks.

Very few Israeli firms actually have Israeli customers, and very few Israeli firms are actually registered in Israel at all, most having their companies established in offshore jurisdictions.

The career paths of those which head the companies in Israel are also a complete contrast to those overseas.

Far from the private school education, internships, and years of experience with large, global blue chip companies, many of Israel’s FX and binary options companies do not have shareholders or public reporting obligations, and are indeed owned by one or two people, who often do not disclose their identity.

The understanding of operations and business model employed by many FX brokerages in Israel is also representative of a complete dichotomy from those abroad, largely because the retail FX and binary options industry in Israel did not rise up from the interbank or technology sectors that it did overseas, and was not established by financial markets professionals with strings of qualifications and shareholders to report to.

Instead, it was a spin-off from the huge gaming, affiliate marketing and sports betting businesses that are set up in Israel that market their services to retail gaming customers overseas (gambling is illegal in Israel).

The retail FX and binary options firms in Israel are often placed in the same category as gaming, sports betting or rebate marketing because they are often operated on the very same principle, by people who own a brand privately and had generated enough capital to buy a closed-system MetaTrader 4 license and recruit sales people in various languages (usually French or Arabic) to sell, under pseudonyms and pseudo-locations, retail FX to customers from a lead list that had been recycled from gaming firms.

For many years, industry players viewed the FX and Binary Options “businesses” as commercial revenue generating enterprises thus are the next best thing to the now saturated gambling industry. As a result, the market quickly became populated with those who understand almost absolutely nothing about financial services but enjoyed the view that it is a financial services product, therefore added a lot more legitimacy vs. traditional online gambling.

The law and Israel

The law in Israel is very strict and very clear. Whilst for many years the FX industry in Israel was unregulated, it has been thus far illegal to sell gambling to anyone on the retail market, and only recently, with the Israel Securities Authority’s new rulings, has retail FX become a regulated product but even so, the parameters and criteria are very stringent indeed.

For this reason, many of Israel’s sales floors use pseudonyms and often tell clients they are calling from Paris or London, and the company is registered offshore under the name of a marketing brand, and then customer deposits are taken  and the profit and loss of clients is what generates the profit or loss of the company.

Of the many brokerages in Israel, very few Israel-based FX companies have an understanding of good practice regarding trade execution, integration, how to process orders, how to connect and maintain a liquidity feed with a prime brokerage, because the business model is ‘I win, you lose.’ This again can be attributed to the lack of knowledge of financial services or simply the lack of concern.

This has become such a difficulty now that the mainstream media has picked it up and the Israeli authorities are working very hard to collaborate with police and authorities abroad in order to close the loophole that has allowed this to proliferate.

Indeed, just two months ago, France and Israel began to work together and place 15 company directors from Israel under criminal investigation.

The French authorities claim that 4XP, BForex, Sisma Capital, Tradaxa and Aston Invest have been involved in a massive scam operation that took an average of €210,000 from each victim and that the suspected operators of the fraud are responsible for an amount that totals approximately €105 million. 50 cases, involving at least 500 identified victims are being treated by the Paris prosecutor and two have thus far resulted in the opening of a judicial inquiry.

Additionally, FX brokerage owner Aviv Talmor was arrested at the airport on his return to Israel earlier this year on grounds of money laundering.

The Times of Israel has begun a series of investigative articles about binary options call centers in Israel, many of which allegedly use pressure selling techniques to an audience which has about as much to do with investing and trading as thermonuclear fission has to do with cheese.

Indeed, the binary options providers that are responsibly operating are in North America, because all binary options trading in the US has to go through dedicated exchanges NADEX or Cantor Exchange, meaning that prices are taken from a centralized exchange and the trader is on the same level as the market maker or broker, and the other is O-SYSTEMS which is based in Cyprus, its O-SYSPRO software requires absolutely no sales team at all, instead automating the entire interaction with customers which empowers them to make their own decisions.

Indeed NADEX is part of IG Group, and Cantor Exchange is owned by Cantor Fitzgerald, therefore both of these entities are very highly respected and vast electronic financial derivatives markets operators, and O-SYSTEMS has been created by highly experienced FX technology experts rather than gaming and betting sales people.

In terms of what aspects of Israel’s electronic trading industry is world leading, it is the technological development, not the brokerage business.

Israel has produced remarkable technology and is home to some of the largest and most widely used and recognized brokerage solutions providers, ancillary service vendors and social trading developers, as well as platforms and digital marketing firms.

The expertise of these is undoubted and, in the retail sector, among the very best in the world, however a great distinction has to be made between the technological developments which are designed for use in large, well known electronic trading firms globally, technological prowess being something Israel is famous for, and the retail brokerages based in offshore jurisdictions which resemble nothing of today’s global retail FX business.

Photograph: Midtown Tel Aviv, Israel