Ask how the business makes money

Graduate · enrolled learners

This lesson opens with Banc De Binary, 2016.

What happened

Banc De Binary, a Cyprus-based firm, was one of the biggest global sellers of binary options to retail customers, all-or-nothing bets on a market moving up or down within a short window, and from 2010 it solicited US customers through YouTube videos, spam e-mails and internet advertising and by phone; the SEC described a representative urging a customer who said he was unemployed, with under 1,000 dollars in his checking account, to deposit more. The SEC and CFTC sued it in 2013 for selling these products to US retail customers without registering them and off any exchange, and in 2016 it agreed to pay 11 million dollars: 7.1 million dollars of disgorgement to be returned to US customers, a 1.95 million dollar SEC penalty and a 2 million dollar CFTC penalty, with a permanent ban on offering such options to US customers. Cyprus's regulator fined it 350,000 euros in January 2016, and in January 2017 it announced it was closing. Europe's securities regulator later banned the sale of binary options to retail clients, finding a structural expected negative return and an embedded conflict of interest between providers and their clients. A binary option, as sold to retail, is structured so that the house profits on average, because the payout for a correct call is set below the true odds, so across many trades the customer is playing a negative-sum game against the very firm selling it. The product was not a broken trading opportunity; it was working exactly as designed, which was to transfer money from customers to the house over time. The customers thought they were trading a market; they were in fact betting against the house on terms the house had set in its own favor.

The decision point

Every trading product is sold by a business that makes money somehow, and how it makes money tells you whether its interests align with yours or oppose them, so before trusting a product you must ask how the business profits and whether it profits from your success or from your loss. Banc De Binary is the case: it sold retail binary options structured so the house won on average, marketed as an opportunity, and it made its money precisely from customers losing, a negative-sum game dressed as trading, until US regulators made it pay 11 million dollars and banned it from US customers, and it closed in 2017. This course is about the landscape of products sold to aspiring and retail traders, binary options, copy-trading platforms, funded-account challenges, managed schemes, and its single most useful question is the one Banc De Binary answers by counterexample: how does this business make money. When a firm profits from spreads and fees on your activity whether you win or lose, or from the payout math being tilted in its favor, or from your failure at a challenge, its interests are not aligned with your success, and no amount of opportunity language changes that. So the discipline is to look past the marketing to the economics: identify how the business is paid, ask whether it is paid more when you succeed or when you fail, and treat a product whose provider profits from your loss as what it is, a counterparty, not a partner. Banc De Binary is what a product designed for the customer to lose looks like when it is working as intended, and the defense is not to spot the fraud after the fact but to ask, of any trading business, the plain question of how it earns its money before you give it any.

Recorded loss

$11,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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