Reform Is On The Way
Two of the biggest problems with binary options, for regulators and traders alike, is a serious lack of transparency and standardization within the industry. When it comes to transparency, it has only been very recently that legit brokers have taken the trouble to let you know who they were, where they were located and the shady ones still don’t. If they do they’re hiding behind shell companies, using virtual offices or move from place to place so frequently it’s hard to keep up with. Even the good brokers don’t really give a lot of detail into how they actually function, or if they are doing so with the best interests of their clients in mind. In terms of standardization, there isn’t any. Each platform is different; the way in which the options are traded, payouts are calculated and the types and range of expiry vary greatly which only adds to confusion already caused by lack of transparency.
CySEC has recently begun to take action to address these issues. They have announced a series of proposed changes to the regulation of CIF’s offering binary options trading. A CIF is a registered Cyprus Investment Firm, the basis of CySEC and EU/MiFID binary options regulation. These changes are meant to help standardized trading, increase transparency, give better terms for clients and provide enhanced investor protections. CySEC Chairperson Demetra Kalogerou had this to say about the subject…
“ Binary Options products as we know them today carry deficiencies and do not provide retail investors with adequate protection when investing in such high risk and complex financial instrument. The proposed reforms now under consultation will enhance the nature, characteristics and trading methodology of this type of retail financial instrument. The new proposed standards regarding the Digital Options Contracts will seek to eliminate the causes of concern regarding the practice that are found commonly to be followed by those providing binary options products, ensuring firms act in an honest, fair and professional manner.”
The reforms are intended to achieve 4 main goals. These are 1) to ensure that brokers act honestly, fairly and in accordance with their customers best interests 2) to ensure that adequate information about the products being offered is provided to clients 3) ensure to orders are executed in a manner favorable to clients and 4) to ensure that orders are executed and filled promptly and expeditiously. The proposed changes are as follows.
- Remove Opaque Strike Pricing – They propose to ban the current method of floating strike prices. The strikes will have to be listed before the trades are made, similar to ladders, and be the same for all traders.
- Quoting In Real Time – They propose to have all pricing available in real time, with a bid/ask spread determined by market action and displaying a current profit/loss outlook based on those prices.
- Lift Restrictions On Exiting Trades – They propose to have all restrictions on exiting trades lifted. This means all options will have an “early out” feature and no windows in which they can be used. This ties into the pricing, there must be continual two way pricing where sellers know what they can get for closing at any time.
- Banning Sub-5 Minute Trading – They propose to ban all expirations less than 5 minutes in order to further remove the possibility of “binary bets”. All options will have at least 5 minutes of expiry.
- Standardizing Settlement Algorithms. CySEC proposes to require all brokers to use the same, CySEC approved, settlement algorithm to calculate pricing and options values as they approach expiry and expire. No individual methodology would be allowed.
These reforms all sound really great and bring to mind a couple of things. The first is that these changes will 100% completely change the way in which EU style CySEC regulated binary options will be traded. This means that the brokers will have to change, and most of them will not be able to keep up. The second thing I think of is that the type of trading these changes describe already exists. It’s called NADEX, the North American Derivatives Exchange, the only US CFTC regulated binary options broker.