More than 40 people in Singapore have lost in excess of US$1.7 million (S$2.4 million) after being lured to take part in an unregulated, sometimes fraudulent and mainly offshore activity known as binary option trading.
One victim of the scam lost a staggering US$693,000 after engaging in this highly risky trading, which is banned in some jurisdictions.
Singapore police are investigating a string of complaints and disclosed the eye-popping losses yesterday, in response to queries from The Straits Times.
Binary option trading involves investors predicting if the price of an underlying instrument - shares or currencies, for instance - will be above or below a specified price at a specified point in time. This can range from a few minutes to a few months in the future.
They receive a fixed amount of money if the prediction is correct, or lose the investment otherwise. It is essentially "yes" or "no" betting - hence the name binary.
The scam is a growing problem worldwide. The authorities in the United States, Canada and other jurisdictions have warned of the risks involved in such trading.
What is a binary option?
A binary option is a type of option contract that references an underlying instrument (such as shares and currencies), where the payout will depend entirely on the outcome of a yes or no (binary) proposition.
With a binary option, you are trying to predict whether the price of the underlying asset will be above or below a specified price at a specified point in time, ranging from a few minutes to a few months in the future.
For example, you could be predicting whether a particular firm's stock price will be above or below $3 at 1.05 pm on a particular day.
When the binary option expires, you will receive a pre-determined cash payout if you have predicted correctly. If not, you lose all your investment.
The starting investment amount is usually low, the timeframe for knowing if you won or lost is short, and the potential payoff is usually high.
However, in reality, many online platforms offering binary options trading are scams.
The investors either lose all their monies, or cannot withdraw the balances in their accounts as withdrawal requests are not honoured.
Last month, the Monetary Authority of Singapore (MAS) warned of the risks of trading binary options, saying many offshore trading platforms are fraudulent and that such options are risky and speculative.
Yesterday, the police here said that binary option providers use a number of ways to attract victims to trade on their platforms.
One of the more common methods involves the use of advertisements, which victims see when browsing the Internet or social media websites. These ads can take the form of paid surveys or articles with catchy headlines, such as "The secret to making fast money".
A police spokesman said: "We have also seen some advertisements which featured 'interviews' with supposed millionaires who made their fortunes from trading in binary options.
"After responding to such advertisements, victims would be asked to leave their personal details or be directed to binary option websites.
"Some... also advertise their services via spam e-mail promoting automated trading software or congratulating the e-mail recipients for being selected to join as a member or sign up for accounts."
Another tactic involves offering bonus trading credits to entice victims to transfer more money to the providers. For example, victims may be promised an additional $250 in trading credit for every $1,000 they transfer to their trading account.
When asked about the progress of investigations, the police said they are working with foreign law enforcers, as almost all the binary option providers in investors' complaints are based overseas. The bank accounts used to receive money from investors are also offshore.
"While these pose challenges, the Commercial Affairs Department is working closely with the overseas law enforcement agencies," said a police spokesman.
He added: "We would like to remind the public to be alert to the risks of transacting with foreign operators without any physical presence in Singapore. Do not transact with any parties, share personal particulars or send them any money if you are unsure. An ounce of prevention is worth a pound of cure."
On Dec 14 last year, the Singapore police issued an alert advising investors to check lists compiled by the MAS to find out which investment service providers are regulated. Back then, the police received more than 30 reports from investors who lost more than US$1 million to unregulated binary option trading platforms.
Since then, more than 10 investors have made complaints involving binary option trading to the police, with the total amount of losses reported in these new complaints amounting to about US$700,000. The amounts invested ranged from US$250 to about US$693,000.