Binary options worth $1.25b to Israel's GDP in 2016

Stock exchanges Photo: Reuters

As Israel mulls banning binary options, a report by "Finance Magnates" reveals just how valuable the industry is to the country.

Last October, Tel Aviv District Court Financial Division Judge Danya Keret Meir ruled that trading in binary options cannot be considered a "banned gambling game" that contravenes the penal code. However, trading in this derivative on underlying assets is regulated in the Securities Law, and can therefore constitute a criminal offense under this law. Keret Meir, nevertheless, rejected arguments made in a class action filed against the iTrader company, one of the most veteran operators in Israel in binary options trading.

Last March, the Israel Securities Authority completely banned binary options trading in Israel. The Securities Authority forbade marketing this trading to Israeli clients, because it regarded such trading as gambling for all intents and purposes, not as educated investment management. In October, it was also learned that the Securities Authority was taking action to extend the ban to all clients, including those overseas. The Securities Authority is currently restricted to supervision and enforcement for concerns offering binary options trading to Israelis. Security Authority chairman Prof. Shmuel Hauser asked the Attorney General to consider extending its authority and amending the law, so that it would be possible to also forbid marketing binary options from Israel to overseas.

Binary options, one of the more controversial trading tools, are not part of the foreign exchange (forex) industry. Forex refers solely to foreign currency. Binary options are a tool for trading in options on underlying assets, such as shares, commodities, and foreign currency.

One thing is indisputable: the binary options trading industry in Israel has a very large turnover. It generates considerable wealth for its entrepreneurs and fattens the bank accounts of its employees, as shown by a special recently published study of the industry.

All or nothing option

What are binary options, and why do some argue that trading in them is equivalent to gambling in a casino? A binary option is both a risk-intensive and a return-intensive investment tool. The option is on the direction of the change, in other words going up or going down, in the sale price of a marketable asset like a share, foreign currency, or a commodity within a predetermined time span. The option is called binary because the investment can have only two possible results: a profit (according to a predetermined return when the change is in the predicted direction) or a total loss (the entire investment is lost, when the change is not in the predicted direction). A binary option thereby eliminates the significance of the size of the difference between the asset price when the transaction takes place and the price when the option expires.

A binary options is also called an exotic option, because the connection between it and the real value of the underlying asset, e.g. a share, consists solely of underlying asset's price when the option expires. In other words, this is the only number that determines whether the person buying the option makes a profit or loses his money. The binary option buyer usually has no possibility of selling the option before it expires. For example, say that the Google share price is $796 at a given moment. The option term says that if the price at the closing is higher than $796 (the exercise price), the investor will make a 70% profit; otherwise, he will lose either 85% or all of his investment. How much higher than $796 the Google share price goes is irrelevant; what is important is that it is higher than the exercise price, in other words, the price when the option was purchased. The same is true of an option on a decrease in the price. The option is on the direction of the change.

The Finance Magnates website specializes in the forex industry, binary options, contracts for difference (CFDs), and the other niches of financial trading. It recently examined the binary options industry in Israel, and reached a very interesting conclusion.

According to the website's investigation, the securities and derivatives trading industry in Israel contributed $2 billion, 0.7%, to Israel's GDP this year, based on the corporate tax it pays. $1.25 billion of this amount, 63%, comes from the binary options industry alone - an astonishing figure in itself. Finance Magnates did not mention the annual turnover of this industry, but assuming that the $1.25 billion amounts to a 25% corporate tax, the options sellers made a $5 billion profit for tax purposes, which means that the revenue is much higher.

But, and it is an important but, a considerable number of these companies are registered in tax shelters, and it is therefore possible that they pay no tax at all in Israel, or if they do pay tax, they may be paying a far lower tax rate than the one stipulated in Israeli law. In any case, the proportions of this industry are huge.

63% of the finance trading industry

What are the leading companies in Israel in the binary options industry? A check by "Globes" shows that these include UFX, 24Option, Anyoption, and Banc De Binary.

According to "Finance Magnates", 70 companies in Israel with 4,700 employees operate trading theaters in binary options. The other side of this industry is the technology providers, who develop the software on which the trading is based and provide that software to the trading theaters operators. Finance Magnates asserts that there are two such technology providers in Israel, and a check by "Globes" shows that the leading one of the two is SpotOption. The two providers jointly employ 300 people, bringing the number of employees in the binary options industry in Israel to 5,000 of the 8,000 in the entire financial trading industry, in other words 63%.

How has the binary options industry reached its dominant position in the overall financial trading industry? Finance Magnates says that the forex industry has shrunk in Israel because of tighter regulation, while the binary options industry has prospered. The Securities Authority, however, is striving to halt its expansion.

The salaries received in this industry are also a matter of interest. The average monthly salary in this industry varies from $3,500 (NIS 14,000) for the lowest position to $15,000 (NIS 60,000) for the most senior position. The lower boundary of this range is more than double the median wage in Israel and at least 50% more than the average salary.

If the Securities Authority manages to bar the industry players from marketing their wares overseas, their thousands of employees may have to look elsewhere for their livelihood. They will at least be on the receiving end of quite generous severance pay.

Published by Globes [online], Israel business news - www.globes-online.com - on December 14, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Stock exchanges Photo: Reuters
Stock exchanges Photo: Reuters
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