The world of binary options is murky at best with new brokers, platforms, regulations and exchanges popping up every day. The way that regulation of the industry has evolved and where it came from makes it hard sometimes to know just who or what you are dealing with. There is a lot of difference between a true exchange, a broker and what many binary options brokers actually are. I think these are important things for every trader to know. This is a look at the differences between exchanges, brokers and what you get when you choose to trade binary. Not all binary is bad but there is enough bad out there to be wary of. CySEC and other EU based regulatory bodies have gone a long way toward establishing a sound and trustworthy means of trading that is good for both the brokers and the traders. In the US CFTC binary options are also gaining traction with advances being made in both arenas all the time.
Exchange Versus Broker – An exchange is a marketplace where participants can buy and sell assets, securities and derivatives. This is different from a broker which is a person or business whose job it is to set up a deal, which may occur on the exchange. Exchanges are neutral, they are a third party entity whose job it is to provide a safe and even playing field on which the market participants, buyers and sellers, can operate. Exchanges are regulated by the appropriate authority in each jurisdiction and are subject to rigorous oversight. An exchange makes its money through transaction fees, that is, a fee charge to each participant for each transaction, and not on your gains or losses. Fees are usually standardized according to trade size and are a small fraction of the total money that changes hands each day. The brokers are licensed and regulated as well, their job is to find and connect buyers and sellers. This can be done as a private service or more commonly through a web site based trading platform.
Binary Options Brokers – Binary options brokers are a beast of a different nature. In the US the CFTC requires that all derivatives, including binary options, to be traded exchange style and even there they aren’t truly an exchange. NADEX and Cantor Exchange match buyers and sellers in order to allow market pressure to dictate pricing but there is no direct exchange of asset between participants. They act as a kind of exchange/broker by providing the platform but also by matching incoming orders. Both charge fees per transaction in order to earn income and have no interest in whether you win or lose. This is much different than an off-shore style spot binary broker. These, such as CySEC regulated 24Option, Anyoption and Banc De Binary, make their money on the difference between the cost of the options and the profit you earn on a winning trade. Each trade is made against the “broker” itself with no concern for matching buyers and sellers. When you lose the broker gets your money, not another trader. On average brokers are only paying about 75-80% of investment on a winning trade, keeping the remaining 20% or so for themselves. IF you lose you lose all. This can cause a conflict of interest as the brokers make more money the more you trade and the more you lose.
Banking With Binary Options– Banking is touchy subject among binary options traders and brokers. Whether or not your money is safe, where you deposits go and the ease of withdrawal are of the utmost concern. The thing to keep in mind is that with most brokers you are in fact not making a deposit, particularly if you are using a credit card. You are in fact buying credits and that is why withdrawal is such a pain in the ass. Even if you send a money order or bank wire transfer you are still not making a deposit with the broker. Your money will most likely go into an account in Hong Kong, The Seychelles or other banking haven. The broker is not paying you profits that have accumulated in your account, they are making a refund of money you used to purchase your credits. Most binary options brokers and platforms are not banks. The only ones that even come close are the brokerages associated or part of a legitimate forex brokerage or bank. Now, CySEC and CFTC brokerages are not quite the same. These are approved brokers and are able to use the banking and clearing house facilities available to other regulated sources of investment and trading in their respective regions. Not all non-regulated brokers are bad, just some of them, always check reviews before choosing.
Gaming With Binary Options – Let’s be honest, off shore binary options as we know it today, including CySEC style, is very close to gaming. 60 Second binary, one touch and other high risk trades are little more than gambling so is no wonder that some brokerages have sprung out of the online gambling industry. This comes with pluses and minuses. On the one hand there is some regulation in place protecting the user and some protection for your money. On the other it furthers the shadowy reputation of binary options and helps to keep it on the fringes of legitimate market speculation. The Isle Of Mann is one place where binary options gaming has taken hold. MarketsWorld is a broker of note based on the Isle and under the regulation of the Isle Of Mann Gambling Supervision Commission.
Regulation is the key to the future of the binary options industry. Those brokers who choose to comply with efforts to create a level and standardized playing field will survive while those that do not will fall behind and eventually die off. I don’t know that there will ever be an international standard for trading similar to forex but we can always hope. Until then educate yourself on the platforms, the brokers and the regulations in your country to make sure you have the best trading experience you can.