The twisted world of illegal CFDs & binary options

December 24, 2020

I was the first one in my extended middle-class family to take up trading as a career back in the early 2000s. Through my 20’s and early 30’s, I was always told to go get a “real job”. The main reason being, trading stock markets is almost always equated with gambling, at least in India. My take on this is that, yes, you can gamble when trading the markets, just like you can gamble with everything else in your life – education (not studying), relationships (not caring), career (not performing), etc. The only difference is that with everything else, the results are usually delayed. For example, if you didn’t study well, you may get to know the impact many years after school/college. But in trading, results are almost always instant, and there is no grey in terms of measuring the outcome. The P&L makes it all black and white. This instant result makes trading feel almost like gambling in a casino. By “trading”, I am referring to short term trades taken usually with leverage, trying to time the market, and not long term investments that involve buying stocks with a sense of business ownership for holding onto for long periods.

As a stockbroker, we sometimes get called a “casino”. We clearly aren’t, because we aren’t counterparty to any trade that happens. All order matching happens on an exchange, and the exchanges match counterparties from the market. When a client of ours loses money in the market, it doesn’t benefit us, but in fact, hurts us as a business. Almost all trading platforms want their clients to earn money when trading, as a winning client will continue trading and generate brokerage revenue. This is unlike a casino where the profit of the casino = losses made by their customers. The reason I said almost all trading platforms is because there is a whole breed of them, illegal in India, but advertised aggressively online to attract traders, where the platforms earn when you lose. These are CFD, Spread betting, or Binary option trading platforms.

Contract for difference (CFD)

When you trade on Zerodha, you can buy or sell stocks or F&O contracts trading on Indian exchanges. Like I said earlier, when the order is placed on our platform, it is sent to the exchange where it gets matched. But, what if a customer reaches out to us asking to buy 100 shares of Apple at say $127? We can’t allow customers to transact in the US markets because we are neither a registered US stockbroker nor have any US brokerage partnership to power this trade. But what if we took that order without the ability to send this client order to the US exchanges? What if instead, in the name of the customer, we as Zerodha in our proprietary account, bought it with a US stockbroker on the customer’s behalf and then created a ledger entry in the customer account to show that it was bought, while the 100 shares of Apple sit in the name of Zerodha with the US broker. If we could do this, Zerodha could potentially have one account across different brokers from around the world where it is buying/selling on behalf of its customers and allow trading essentially in anything that moves. If we did this, the ledger entry or the contract with the customer would be called CFD or contract for difference, and we would be a CFD broker.

As you can imagine, this contract between the customer and CFD broker is private and not on the exchange, and hence it is called an OTC (over the counter) contract. CFD platforms first showed up in the UK in the early 1990s when there was a growing demand to trade global securities (especially US). The regulators there allowed these platforms, and they flourished because of the ease at which you could now trade almost anything from around the world without having to worry about local brokerage relationships or movement of money to different countries. What was first offered to only hedge funds, soon found its way to retail traders as well.

So on a CFD platform, you can go long (buy) or short (sell first to buy back later if the market falls, to profit when prices drop), and typically these platforms will support trading on almost all popular stocks, indices, commodities, and currency from around the world. When you buy a CFD, you don’t actually own the underlying, but you have a contract with the platform that will give you a payout based on the price change of the underlying. And the kicker, your trading costs in terms of taxes and exchange fees is almost 0. These platforms earn by keeping a small spread, the price difference on the CFD platform vs the actual price of the underlying instrument in the markets. CFDs typically don’t have an expiry, which means that you can hold these contracts forever or at least until the CFD platform where you trade continues to exist. The biggest risk of trading CFD is that it is an OTC product and that there is no exchange or clearing corporation involved. If the CFD platform goes bankrupt or rogue – so will all your positions and cash lying with them with little legal recourse.

Convoluted CFDs

Like I mentioned earlier, CFDs started off with the idea that when a client on the platform trades, the platform will take the same trade in the underlying security in whichever exchange it trades on. The CFD platform is just a passthrough entity, without assuming any directional risk. But as CFD platforms gained popularity, people who ran these platforms realised that the majority of their customers who trade tend to lose money when trading. So someone thought, what if we didn’t take that trade in the underlying exchange when the customer placed a trade on the platform? What if we were the counterparty to every trade on the CFD platform? So if a majority of the customers lose money trading, the platform profits by taking the losses from losing customers and giving back some of it to the profitable customers. The bet essentially was that a large group of traders on an overall basis would lose money trading, so the CFD platform can win by just being opposite to the entire group of traders. So CFD, which started off to give easy access to various markets now became what is called a closed-loop CFD platform or essentially a casino where the house wins when the traders lose.

As soon as this shift happened in the CFD platforms where they moved from earning from transactions through either a spread or fee to profiting when clients lost, the incentives got misaligned with the customer interest. Now the platforms had to figure a way to get a trader to lose money on the platform, that is, trade at extreme amounts of leverage. Leveraging trades with much higher capital than own capital is the single biggest reason why traders lose money. Some of these platforms today offer from 50 times to a ridiculous 1000 times leverage. A 1000 times leverage means that a trade can be entered paying just 0.1% of its actual value. This means that you can double the money if the market moves 0.1% in your favour or lose the entire capital if it moves 0.1% against you. For those blinded by greed, this might seem like a great opportunity, but in reality, it is almost impossible to survive as a trader with such obscene levels of leverage. There might be a few lucky trades where money doubles, but traders generally don’t stop trading when they profit and eventually can end up losing the profits and more as they are always just one small incident away from blowing up.

Unsurprisingly, many CFD platforms are based out of countries with lax regulations such as Malta, Cyprus, Belize etc. There are allegations that many of them intentionally rig market prices displayed on their platforms against customers for a fraction of a second to cause enough loss, so the customer is forced out of the position. Of course, customers will stop trading on these platforms if there is a mismatch in terms of data as compared to the underlying exchanges where the security trades, but it is difficult to pinpoint a mismatch that happens for a fraction of a second. This is a huge risk on these platforms, where customers only have their word to go by, unlike a regulated market like India, where order matching only happens at exchanges. And within CFDs, there is a class of instruments known as binary options which have an expiry time/date for the contract. They are extremely popular as their short durations means lower risk of customers profiting, and hence, an opportunity to offer much higher leverages than normal CFDs.

Are CFDs lucrative?

For dubious business operators, it is a lucrative business to run as long as they are able to continuously “churn” new customers who sign up and lose money. That said, every business, even the ones rigged against customers, come with their own risks. Once in a while, when there is a black swan event that causes prices to move wildly, a group of customers can make a windfall greater than the other group customers losing by large amounts, pushing these platforms to become insolvent. One such incident was when in 2015 the Swiss Bank removed the peg of 1.20 francs (CHF) to the Euro; Swiss Franc moved up 30%.

EUR/CHF fell 30% in a day

If a platform was providing 100 times leverage and if there was a customer long $1000 of Swiss Franc on that day, the profit for this customer would have been a whopping $1million. Of course, there would be customers short Swiss Franc, but the maximum any customer can lose on these platforms is the money in the account. So the net payout would have to be coughed up by CFD brokers from their own pocket, and as you can imagine, many CFD brokers went bankrupt on that day.

So yeah, even if one hits the jackpot some day, a CFD platform might not be around to make the payout on that day.

Illegal in India, yet openly advertised

Running a CFD platform and trading on them is illegal in India. But over the last couple of years, many of these platforms have been luring retail Indians to trade on these platforms by using advertisements inducing greed. These ads usually talk about how quickly you can become a multi-millionaire. Many of these platforms even give upto $1000 of seed money in the account to get started. Of course, this money can’t be withdrawn and can only be used for trading, enticing users to get addicted enough to transfer their own money. Here is the link to the RBI circular on this matter.

(ii) As and when any AD category I bank comes across any prohibited transaction undertaken by its credit card or online banking customer the bank will immediately close the card or account of the defaulting customer and report the same to Chief General Manager-in-Charge, Forex Markets Division, Foreign Exchange Department, Reserve Bank of India, Central Office, 5th Floor, Amar Building, P.M. Road, Mumbai – 400001 in the format provided in the Annex to this circular.

Even with regulations in place, there are celebrities including Indian cricketers advertising some of these shady platforms operating out of tax havens offering “FX trading”. I assume they are unaware that the financial products they are promoting is illegal. It is likely that a significant number of retail traders are losing huge amounts of money on these platforms regularly, and that the funds may be flowing out of India. Not to mention, the bypassing of taxes on securities transactions. I hope RBI and the concerned regulatory bodies investigate these dubious operators and enforce strict action.

Updated 7th Sep 2022. RBI has put out a press release cautioning and warning that resident persons undertaking transactions on such unregulated platforms shall render themselves liable for penal action under FEMA. They have also shared a list of electronic trading platforms with whom resident Indians shouldn’t be dealing.

RBI press release, 7th Sept 2022


As they say, if something seems too good to be true, it probably is too good to be true. There is no way to make easy money trading on these platforms. On the contrary, since these platforms earn when you lose, it is almost impossible to ever come out with profits, just like in the case of a casino. If you have friends or family who might have succumbed to greed and trading or considering trading on one of these CFD platforms (Binary options, Spread betting, FX trading etc), please stop them, if nothing else because it is illegal and their bank accounts might get frozen. And remember that if you are buying and selling securities, make sure you are doing it only through a SEBI registered intermediary.

For any questions on CFDs and binary options, join the discussion on TradingQ&A.

Founder & CEO @ Zerodha

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