The ESMA Ban On Binary Options, Why Traders Don’t Care

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The ESMA Ban On Binary Options, Why Traders Don’t Care

We Knew It Was Coming, And We Don’t Care

The ESMA followed through with its plans to ban binary options within the EU. The regulator, acting the interests of consumers, have issued a blanket ban on all brokers, trading and options with a limited time frame and all-or-nothing payout. According to the press release, the ESMA concluded that there posed a significant risk to public safety that needed to be addressed and we applaud them on the efforts. They want to protect unwitting investors from getting scammed by one of the many frauds that have plagued binary options. Too bad they didn’t do something about it sooner, maybe they could have saved a fun way to trade.

  • According to data used by the ESMA to make their decision roughly 80% of all CFD and binary options trading accounts lose money. Losses range from $1000 up to $30,0000 on average.

The Alternative – CFD Trading

Regardless, we don’t really care about the ban because of one thing, even good binary options pale when compared to CFD trading. Any trader who can make money consistently with binary options knows they could make even more money with a CFD. Binary options limit the risk but they also limit the gains, not taking into consideration the trouble with expiry. Choosing the right expiry for a binary options is very difficult. Traders using CFDs can employ stop-losses to limit risk and make open-ended profits provided the asset keeps moving in the direction of choice.

Traders should be aware that the ESMA’s new regulations include restrictions on CFD trading. They have curtailed marketing of CFDs to help control out-of-control marketers and their get-rich-quick schemes. Hopefully it works but I’m sure the marketers will come up with some new way to get the suckers. The ESMA has also put a limit on the amount of leverage you can use, no more than 30X, as well as requiring negative-account and margin-call protections to limit the amount of losses a trader is allowed to rack up.

Regardless, CFDs remain the better choice, and for now, the only choice for traders looking to trade with a broker based in Europe. Another option, no pun intended, are ladder-style options like what you find at NADEX and IGMarkets and some other brokers. I hope to see the ESMA back off the binary options ban once the scams and fraud have died down but I’m not holding my breath.

The ESMA Ban – And How To Continue Trading

ESMA Extends Ban On Binary Options

The ESMA ban on binary options has been extended again, and in all likelihood, the ban is likely to remain in place indefinitely. So with a blanket ban on the marketing and sale of binary options in Europe, is there anything traders can do to continue trading? Possibly…

How The Binary Options Ban Is Affecting Traders

Starting July 2020, the European Securities and Markets Authority (ESMA) has prohibited the marketing, distribution or sale of binary options to retail investors. The ban was and still is temporary, for a 3 month period, with the possibility of renewal when said period is up.

Since then, ESMA has constantly renewed the ban, and have announced they will do so again when the current period is up, on the 2nd of January 2020. The Authority will probably continue to renew this measure indefinitely, so EU customers are not likely to trade Binary Options anytime soon, at least not with regulated brokerages.

Currently we are dealing with a black and white situation, without much room for interpretation: binary options cannot be marketed, sold or distributed to retail clients. Actually there’s a “but” somewhere in there because ESMA has decided to exclude from the ban some forms of Binary Options.

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However, as you will find out next, these exceptions are almost impossible for the brokers to implement while still making enough money to avoid bankruptcy.

Exception 1: “A binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs

That’s a White Unicorn if I ever saw one. It basically means that on any given trade the worst outcome is you get your money back, including all commissions and fees. The other outcome is to win the entire payout. Looking forward for any brokerage implementing such a binary option but I won’t be holding my breath!

Exception 2: A binary option that meets the next three conditions cumulatively:

  • expiration time of at least 90 calendar days
  • a prospectus drawn up and approved in accordance with the Prospectus Directive (2003/71/EC) is available to the public
  • the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges”.

While the first 2 conditions are pretty straightforward, the last one may need a bit of clearing up: the brokerage should have no interest in the outcome of the trade. In other words, the old conflict of interests where the brokerage would make money when you lose a trade should completely go away.

Remember that all three conditions are cumulative, so it will be extremely difficult for a brokerage to implement them all at once and to make this type of binary option both lucrative for them and appealing to traders.

Avoiding The Ban

In short, yes. There are some viable ways to continue trading. One choice we are not going to expand on is using unregulated brokers – this is high risk and fraught with danger, to the point where it should not even be considered. One downside to the ban, is that it does nothing to address the scams. They operated outside of the law anyway, this ban will not change their behaviour (It may even embolden them as they know the European regulator has no appetite to chase them). Only use regulated brokers. So with that said, let us move on to some genuine ways you can carry on trading;

Going Professional

This choice will only be open to certain traders. You need to prove a certain amount of trading experience, and trading capital. Assuming you can, then you can register as a professional trader. This makes you exempt from the ESMA rule changes (You are no longer a ‘retail’ investor). Brokers can lawfully offer you binary options again. The downside is that you sign away any regulatory protection. You are basically saying you are financially aware enough to use high risk products. It is a great choice for experienced traders and indeed, many have already taken this step to continue trading just as they were.

Alternative Products

Many brokers have created similar products to binaries, but made them different enough to dodge the ban. These include FX Options and Knock Outs. Expect more to follow. While not strictly binaries anymore, many of the same strategies will work. One note of caution however, is that ESMA are watching these products closely. If they feel the ban is being flouted, they may insist the new products are removed too.

Enquire With Your Broker

This option needs some detective work. Many brokers have multiple regulated ‘arms’ all under the one brand. For example, they may have a European based company, regulated in Europe, and another company registered in Australia or Malaysia to service each market. As a retail trader, you are able to request an account with one of the other ‘offshore’ or non-european companies, but with the same brand.

ESMA will allow European traders to trade under a different arm of the same brand – as long as the request came from the trader – the brand themselves are not allowed to market this as an option for their customers. ESMA have already reprimanded a couple of brands for trying. But as long as the request comes from you, the trader, then it is ok for the broker to facilitate that change for you. Once operating under another regulated arm of the business, you can access binaries again.

So get the deerstalker on and see if your broker has regulated branches in different jurisdictions.

Conclusion

So with these choices, it is possible to carry on trading, possibly without even leaving your current broker. There is also absolutely no need to look at unregulated firms. So the ban on binary options does not have to mean the end of your binary trading.

European Traders – new ESMA regulations!

Does ESMA Regulations have impact on you and what your actions wi
Yes, the have impact but I’ll keep my broker. 21 Votes 15%
Yes, the have impact and I’ll look for new broker 76 Votes 55%
Not sure yet 12 Votes 9%
No impact on my trade capabilities 12 Votes 9%
I have non EU Broker so don’t care 16 Votes
  • Post # 1
  • Quote
  • First Post : Jun 24, 2020 12:00pm Jun 24, 2020 12:00pm

I would like to ask all EU traders on their opinion and views on incoming Leverage and Margin restrictions by ESMA.

I personally think that this new rules will have negative impact on Retail Traders and are created to protect brokers, not us. however EU brokers will lose a lot or retail clients to overseas and unregulated counterparts if solution is not found.

What’s your Plan B?

  • Post # 2
  • Quote
  • Jun 24, 2020 2:37pm Jun 24, 2020 2:37pm

Even I currently use a leverage less than 20, the incoming Leverage and Margin restrictions by ESMA will have a significant impact on the Margin used so I will decrease my leverage even more in order to keep my system properly working.

On the other hand, I think the incoming Leverage and Margin restrictions by ESMA are against the retail traders, while they are applied even on profitable accounts.

PS. From Oanda received by e-mail :

Impact to existing retail clients

If you have open positions at market close on 27 July 2020, any sub-accounts on which you have open positions will be marked as ‘closing trade(s) only’ to limit the impact on your existing trading. This means that although you can move funds into and out of the account and close open positions, you will not be able to open any new positions. Leverage rates for these pre-existing positions will remain at the level at which they stood when you executed the opening trades. Consequently, in order to open any new positions you will be required to open a new sub-account(s) that will reflect the above stated leverage limits.

If you do not have any open positions at market close on 27 July 2020, we will update your existing sub-account(s) to default to the above stated leverage limits. If you were previously trading using leverage lower than the new ESMA limits, on 29 July 2020 you can lower your leverage through your account management portal in the Manage Funds section.

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