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Investors welcome tougher Israeli regulations

  • Investors in Israel relieved by ban on trading binary options to foreign clients.
  • The ban is to face a vote in Israel's parliament.
  • Trade in binary options has been linked to large-scale fraud.
A stock market ticker displays financial information and world time zones in the lobby of the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel
Rina Castelnuovo | Bloomberg | Getty Images
A stock market ticker displays financial information and world time zones in the lobby of the Tel Aviv Stock Exchange (TASE) in Tel Aviv, Israel

Investors in Israel's high-tech sector have reacted with relief to a new ban on trading binary options to foreign clients that the government approved yesterday (June 18). The ban still has to be voted on in the Knesset, Israel's parliament, and will then join the one that was approved last year on marketing such products to domestic customers.

"These people have been a plague on Israel's reputation," said one high-tech investor who asked to remain anonymous in order not to be associated with the binary options issue.

The trade in binary options has been linked with large-scale fraud, to the degree that the FBI in March issued a warning to investors. Apple earlier this year took steps to ban apps that offer the trade from its App Store. Many binary options firms that international clients have complained about are based in Israel, investigations by The Times of Israel and Reuters have shown.

The head of the Israel Securities Authority, Shmuel Hauser, acknowledged Israel's position in the often questionable trade in a comment on the ban: "Beyond the severe economic harm to citizens around the world, marketers of binary options are increasingly causing reputational damage and inflaming anti-Semitism towards Jews and Israelis."

As the country's chief regulator, Hauser recently likened the damage done by binary options to that inflicted by "blood diamonds".

One investor said that the ban was overdue but that at least, "It shows there's a sheriff awake in the Israeli compliance and regulations field."

Binary options are a win-or-lose, hence binary, bet on the movement of a stock, commodity or, often, a currency. Investors can put money on whether the asset will move up or down over a certain period, whether weeks or minutes. The latter especially, has been likened by regulators in several countries to gambling. If the stock or currency moves down, the investors lose all their money.

A trader works at the Israeli stock exchange.
Uriel Sinai | Getty Images
A trader works at the Israeli stock exchange.

In the US the trade in binary options is regulated but the FBI in March warned that much of it was taking place on websites that weren't. "Many of those unregulated websites are being used by criminals outside the U.S. as vehicles to commit fraud," it cautioned.

The use of online trading platforms links the practice to Israel's booming financial technology industry. Some of the most-used social trading platforms also offer binary options, albeit that they have committed themselves to regulation in the jurisdiction where they're registered and are not associated with fraud.

The link between technology and the binary options trade was underscored recently when Apple included a warning in its app developer guidelines under section 3.2.2, 'unacceptable': "Apps that facilitate binary options trading are not permitted on the App Store."

While Israel's share in the binary options trade has caused reputational damage, the investor who wished to remain anonymous said that it had not hurt the country's high-tech investments: "It hasn't had an impact on the legitimate investment field because most people understood that this was something entirely different."

Yet, the Securities Authority in a statement did mention damage to investments as a reason to extend the ban on trading binary options from Israel to investors worldwide: "This phenomenon has assumed much larger proportions, and has generated a major negative worldwide impact, while significantly damaging Israel's image in general, and that of the capital market in Israel in particular."

Israel has taken steps in recent years to distance itself from the binary options trade and has cooperated with other countries against fraudulent practices. Earlier this year the head of what the police said was a binary options trading firm was taken into custody after a foreign client had complained of having lost $500,000.

Many binary options traders have relocated from Israel since the first measures were taken last year and some social trading platforms have stopped taking investments from Israelis. In one high-profile case, Banc de Binary stopped operations in January this year and surrendered its Cyprus trading license after, among others, having settled a lawsuit in the U.S. in 2016 for $11 million.

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