Risk & Compliance

Israeli Firm Fined $1.7M Over Online Trading

EZTD promoted binary options trading over the internet as "highly profitable" but the SEC says 81% of the firm's U.S. customers failed to make a pr...
Matthew HellerNovember 11, 2016
Israeli Firm Fined $1.7M Over Online Trading

An Israeli firm that operates online trading platforms has agreed to pay more than $1.7 million to settle charges that it failed to disclose the risks of trading binary options, costing U.S. investors about $2 million in losses.

The U.S. Securities and Exchange Commission said EZTD Inc. represented to investors that binary options would be “highly profitable” when, in fact, there was “significantly greater potential” for them to lose money.

Between June 2011 and August 2014, about 4,000 U.S. customers invested roughly $2.5 million in binary options with EZTD, betting that a stock would rise above or fall below a specified price by the time the option expired.

According to an SEC order, EZTD’s payout structure was rigged against investors, who would lose money if they did not correctly predict the future price trajectory of the stock underlying the options they had purchased with a greater than 50% accuracy rate. Approximately 81% of its U.S. customers allegedly failed to earn a profit.

The firm, which operated the eztrader.com and globaloption.com trading platforms, will pay disgorgement of $1,515,858, prejudgment interest of $57,691, and a $200,000 fine as part of its settlement with the SEC.

“EZTD’s revenues were largely derived from customer trading losses, yet EZTD emphasized the profitability of trading in binary options,” Stephanie Avakian, deputy director of the SEC’s Division of Enforcement, said in a news release. “Companies dealing in binary options must disclose more than general statements about investment risk so investors in these instruments understand that the odds are stacked against them.”

Investors in binary options who make a correct prediction on the movement of a stock receive a pre-determined amount of money that exceeds what they paid for the option; those who predict incorrectly forfeit all or nearly all of the purchase price. A binary option does not give the holder the right to purchase or sell the underlying asset.

The SEC said that under EZTD’s payout structure, a customer “could not earn a profit investing in binary options unless 54.5% of the total dollars that he invested across all of his trades fell into trades” where he made a correct prediction.