In October 2015, FINRA issued an investor alert, “Binary Options: These All-Or-Nothing Options Are All-Too-Often Fraudulent.” The alert, and FINRA’s related press release, may be accessed at the following link: http://www.finra.org/newsroom/2015/finra-investor-alert-binary-options-these-all-or-nothing-options-are-all-too-often

FINRA’s first concern is inherent in many types of option contracts or warrants: binary options can be “all-or-nothing propositions,” in that they can expire worthless. In addition, and in what appears to have triggered the alert, based on calls to its senior citizen investor hotline, FINRA has identified a variety of fraudulent schemes involving these instruments. These schemes often originate from unregulated entities operating outside of the U.S.

This is not necessarily a new problem; the SEC issued a somewhat similar alert in 2013,as has the CFTC.4

The fraudulent acts committed against investors have typically involved one or more of:

  • Refusing to credit customer accounts or to reimburse investor funds;
  • Identity theft; and
  • Manipulation of software to generate losing trades.

These schemes could be confused by some investors with structured warrants or some types of structured notes. But of course, structured warrants and structured notes sold to retail investors are typically registered with the SEC, and offered by registered broker-dealers that are regulated by FINRA.