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Binary Options Trading: NADEX Reviews or Nada, SEC Warns

“To date, only one entity that offers binary options has been granted status as a designated contract market—the North American Derivatives Exchange, Inc (NADEX). All other entities that are offering binary options that are commodity options transactions are doing so illegally.”

The Securities and Exchange Commission, in an investor alert issued on June 6, 2013, has made it very clear. This is important in the light of recent fraud complaints received by the agency related to online binary options brokers with dubious practices. Chief among these complaints are the refusal to credit customer accounts or reimburse funds to customers, identity theft, and manipulation of software to generate losing trades.

For a clear idea of what binary options are and a NADEX review, read the primer “Binary Options Trading: An All or Nothing Gamble?” that explains the concepts behind this investment option in greater detail. Essentially, binary options involve a yes/no proposition. Will the price of an options contract rise above specified price? Will it fall below? Your yes or no answer to either of those questions will determine whether you’re in-the-money (win) or out-of-the-money (lose) when the contract expires.

Each binary options contract also specifies a predetermined reward for a winning guess. If you guessed incorrectly, you either lose all of your investment or you get back only a very small fraction of it. This is why binary options are often referred to as “all-or-nothing options” or “fixed-return options.” Read Binary Options: The Way to Play for a detailed explanation of the odds and how the binary options game should be played to increase your chances of winning.

Binary options are a legitimate investment, usually employed by investors to hedge against an opposite position in normal options trading so that losses are minimized. If an investor is confident of his position, he can use binary option to rev up the earnings from that position. If legitimate, why then the complaints?

Beware of binary options fraud

Only a small portion of binary options are traded in exchanges regulated by the US government through the SEC or the US Commodity Futures Trading Commission (CFTC) – you may want to read more about it in our NADEX reviews. According to SEC, “much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable US regulatory requirements and may be engaging in illegal activity.” These fraudulent activities include:

Irregular fund management

To participate in online binary options trading, the consumer has to open an account an online broker and deposit a minimum amount. This amount is used by the trader to buy options. Amounts are credited or debited from the account depending on the performance of a contract. Customers complain that Internet-based binary options trading platforms do not credit earnings to customer accounts or reimburse funds after accepting customer money.

Customers that have been victims of this suspect that many operators simply do not have enough funds to cover losses. Lack of proper regulation means that for as low as $20,000 people can open an online trading platform and may not have sufficient cash to cover losses on contracts where more customers are “in-the-money.”

These online operators do not charge commissions and will only make money if customers are “out-of-the-money.” Telephone calls and emails are ignored when customers complain that they can’t withdraw money from their accounts, or are settled many weeks after the request was made.

Identity theft

Some platforms collect credit card and driver’s license information without specifying the purpose. Customers are advised never to provide financially sensitive data to these online trading platforms. A recent spate of scandals involving the unauthorized withdrawal of millions of dollars from ATM accounts should be enough warning to all.

Manipulation of trades

This usually involves manipulating the expiry date or time of contracts so that the customer finishes out-of-the-money. There have been numerous complaints about “winning” contracts that eventually ended on the debit side when the expiry was extended.

All that’s for plain fraud, when the online broker has every intention of shortchanging the customer. But what if the operation is illegal in the first place, or non-compliant to government regulations? Then, this transfers the burden of responsibility to the customer, because while the government can run after entities operating illegally it is under no obligation to enforce a non-legal agreement.

For example, the binary options contract may be based on the price of a company’s securities, and securities may not be offered or sold without registration, unless an exemption from registration is available. Also, binary options trading platforms may be operating as unregistered broker-dealers without SEC’s approval.

If the platform offers options on commodities and requires a margin (deposit) for participation, then the broker needs to be registered as a Futures Commission Merchant. If the contract being offered is for foreign exchange to customers with less than $5 million net worth, then the platform must be registered as a Retail Foreign Exchange Dealer.

SEC’s warning is clear. “You may not have the full benefit of the safeguards of the federal securities and commodities laws that have been put in place to protect investors, as some safeguards and remedies are available only in the context of registered offerings. In addition, individual investors may not be able to pursue, on their own, some remedies that are available for unregistered offerings.”

Protection vs. binary option fraud

You’ll have to look out for yourself and do the homework to ensure that you don’t fall victim to unscrupulous online binary options traders. SEC offers the following advice:

  • Beware. Most Internet-based binary options trading platforms are operating outside of US regulations.
  • Don’t invest in something you don’t understand. Read the fine print. If you still don’t get, don’t let go of the precious cash
  • Check the SEC’s EDGAR database to see if the product being offered is registered.
  • Check to see if the online trading platform is registered as an exchange.
  • Check the CFTC listings to see if the online platform is a designated contract market.
  • Use the FINRA Broker Check service and the BASIC Search service to check on the online broker’s records and history. If they’re not listed at all, hold on to your money. Better yet, send SEC or CFTC and email.

Binary options trading is being marketed aggressively these days, and a simple Google search won’t give you the answers you need because online brokers are dominating the top results. While there is money to be made, don’t rush in blindly. There’s a right way and a wrong way to go about it. If you’re trading in NADEX, you should be safe. If not, nada. Not good. Not good at all. Read the full text of SEC’s investor alert.

Binary options too exotic for you?
Consider more sensible investment options.

 

Nestor Gilbert

By Nestor Gilbert

Nestor Gilbert is a senior B2B and SaaS analyst and a core contributor at FinancesOnline for over 5 years. With his experience in software development and extensive knowledge of SaaS management, he writes mostly about emerging B2B technologies and their impact on the current business landscape. However, he also provides in-depth reviews on a wide range of software solutions to help businesses find suitable options for them. Through his work, he aims to help companies develop a more tech-forward approach to their operations and overcome their SaaS-related challenges.

5 Comments »
dolamite says:

I have been a nadex user and would like to tell my experience so far. First, I'd like to say that I've been a registered person in the financial markets and have traded various assets. The prior comments are a bit harsh, but does have a aire of aspects if you don't understand what's going on. I'll lay out the challenges.

Under contract the two mkt makers must have the spread as wide as possible. You'll see this in a settling mkt, 10 dollars. Though the cur.pair prices are displayed(reuters), the actual price movement on the charts do not move in tandem. I believe this is by design and is advertised as an 'indicative' price action, but few understand what that actually means. Each transaction round trip is $1.80 - no charge for losing trades. So to give you an idea, if you had a $500 account and did 15 winning trades a day five times a week you'd have to cover $135 in fees. One would think the benefit of losing is not paying the fee so who cares? If you are long you lose the contract price, but if you're short and lose you've lost the entire $100(if you win, you gain just the intrinsic value, kinda rough). A previous comment brought up the notion that the big moves are made in the last 30 seconds of a contract, when all mkt making ceases. This is speculation, but remember the price action isn't the real cur.pair action and is indicative. Coupled with the notion that the mkt makers need to make money, they can easily compute the sides and put things into their favor...Who knows. There's enough going against you to realize that this is NOT easy money and is actually quite far from the truth. Understand that binary option trading is a simplified way to make or lose money around the movement, even if adulterated, currencies. Can you make money? The answer is yes, but you need to take a large risk at each trade to be profitable under the guise it's only maxed at the contract price. Those who say otherwise have not traded professionally and are not being honest. One can easily lose their accounts trading Nadex, just like any other binary account.

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D says:

Nadex is a scam, hands down! The numbers always seem to change away from your favor at the very end when you've lost most of your investment.

Reply to this comment »
Alan Mellon says:

Nadex has the worst customer service in the industry! Also, their spreads are criminally wide, and when you have any problems with the account -- their agents are arrogant and rude!

Instead, trade ISE options or something else with you regular broker. Nadex is a failure from day !

Reply to this comment »
james says:

I would only trust official US licensed ones. The only ones I know of are "How We Trade" and "Nadex". Don't trust ones located in placed like Cyprus or Malta. Those are the true scams.

Reply to this comment »
james says:

I agree that there are many binary options scams & frauds. That's why it is so important to read a lot of articles like this one, in order to be aware and avoid falling to those crooks broker.
I think that reading as much reviews as you can find about a broker is a must.

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