Nadex argues Canada’s binary options ban should apply to fifty/fifties

The volume of comments concerning the proposed binary options ban in Canada has been growing, with North American Derivatives Exchange, Inc. (Nadex), a subsidiary of IG Group Holdings plc (LON:IGG), adding its voice to the chorus of companies, institutions and industry bodies stating openly their opinion on the proposal.

A comment letter, signed by Nadex’s CEO Timothy G. McDermott, was sent to the financial regulators of Quebec and Alberta on May 29, 2017.

Nadex makes a convincing point regarding the definition of binary options targeted by the proposed prohibition. According to Nadex, the binary options that Nadex and other regulated US exchanges list are markedly different from the types of “binary options” that are the driving force behind the Proposed Instrument.

Nadex argues that the Canadian proposal fails to differentiate between two types of options:

• the simple up/down contracts marketed predominantly by entirely unregulated firms and labelled as “binary options” (“fifty/fifties”),
• and the volatility-driven binary options that have been offered for many years by regulated firms dealing over the counter in Europe and Japan, or in the United States on Exchanges (“volatility binaries”).

The vast majority, if not all, of customer complaints related to “binary options” in Canada concern the fifty/fifties, according to the Exchange. Indeed, it believes that the scale of mis-selling is so great that it may be appropriate to refrain from permitting regulated firms in Canada from offering the fifty/fifties contract type.

Nadex believes the fifty/fifties have commonly become identified with the term “binary option” but these should be considered not as an option but as a financial instrument with the characteristics of a fixed odds bet.

Nadex says that instead of the Proposed Instrument (an outright ban on all sorts of binary options with a duration of less than 30 days), which is unlikely to stop mis-selling, authorities should work with search engines like Google and Yahoo to limit online advertising of illegal binary options offerings in Canada, as well as collaborate with payment services providers to stop the fundings of companies illegally offering binary options.

The Exchange argues that the offering of volatility binaries, like vanilla put and call options or other legitimate financial instruments, should be permitted as long as the offeror is appropriately regulated and applicable requirements (client onboarding, risk disclosure, etc) are otherwise met.

A very interesting point is made with regards to the proposal to limit the ban to options with durations of less than 30 days. Nadex argues that even a longer term contract will eventually become a one-day, then one-hour, then one-minute contract as it nears expiration. Hence, Nadex says, a 30-day limit is arbitrary.

The Consultation on the binary options ban closed in Quebec and Alberta on May 29, 2017, but continues in the rest of Canada’s provinces and territories.