Rotich Henry, Treasury Cabinet Secretary, has made capital markets Regulations to regulate online foreign Forex traders in Kenya. In the Regulations, Rotich has banned binary options.
Many have been left wondering. What are binary options? Why should they be banned? We shall explain.
An option is a contract, that gives a buyer a right, but not an obligation, to buy (call option) or sell (put option) a financial asset (such as shares) at an agreed date (exercise) or other date (strike).
It may sound simple. For this is just an ordinary option. But Binary options, especially in currency exchange trading, are different.
Binary means two. Thus, in binary option, there only two possibilities. Of Yes or no.
How it works, is this way. You place a bet, by answering either yes or no, that during a certain time, a certain currency will go up, from a specified fixed price.
If you answered it the price will go up, and it goes down, you lose everything. This is unlike the normal option where a trader loses only the value of underlying assets.
Warren Buffet, the sage of Omaha, hates derivatives, options included. He says they are financial weapons of mass destruction. We do not disagree. Whereas equities are the sedatives of the market, derivatives are the aphrodisiacs. They hype trading.
But Warren maybe right. Indeed, binary options are lethal. To the market, they present a zero sum game. A Pareto efficiency, where for one to gain, another must lose. This is lousy.
But they make markets liquid. They promote activity by raising adrenaline. More so, during these called turbo trading, where trading is finalized in just a minute.
People from Jerusalem love binary options nevertheless. They have so many binary options dealers over there. But the frauds and scam dealers have equally nourished, spreading their crooked ways from Jerusalem to elsewhere, then everywhere.
Apart from giving market a hype, binary options serve no economic purpose. Rotich was right, to ban them.