As the binary options industry continues to grow, becoming ever more visible in online and traditional media alike, regulation is also turning into a hot topic. In a recently released forex industry summary for 2012, the downturn in forex trades for the year was attributed in part to the popularity of binary options, especially among customers who are new to trading. With binary options now in a position to steer prospective clients away from traditional forex, the respectability of this relatively new trading instrument is paramount, especially if it is to continue to grow. A larger number of potential traders translates directly to more companies seeking a piece of the action. This means more brokers and more trading platforms; which in-turn leads to greater competition, less differentiation between brokers, potentially fewer profits to go around, and a motive for many companies to behave less than ethically. Regulatory bodies oblige all licensed binary brokers to adhere to certain standards and also have the power to penalise firms who fail to do so, and to order them to cease and desist all activities until said body is satisfied that they are in full compliance with regulations. These responsibilities obviously include providing traders with accurate information, timely prices, and fair pay-out structures but there is a lot more to it than this. Please read on.
Why Regulation is Important to Binary Traders.
A regulated binary brokerage must keep its clientsâ€™ funds in segregated accounts that are completely separate from the companyâ€™s operating accounts. This is important for a number of reasons. Firstly, it ensures that customer funds are protected and prevents companies from closing their offices, moving their clientsâ€™ funds off-shore, and absconding with the money. Secondly it means that a company cannot use the money in one traderâ€™s account to pay-out another winning trader. Thirdly segregated accounts prevent there being any pay-out issues should an inordinate number of traders all choose to withdraw their funds at the same time. Many unregulated brokers are guilty of at least two of the above. The tentative balance they strike by employing these business practices can only be maintained as long as there are more traders losing on their platforms than winning. As soon as the reverse takes place they have instant liquidity problems and tend to disappear with their clientsâ€™ funds.
One of the main ways in which disreputable companies make money is by manipulating the asset prices on their platforms in order to impose what amounts to a spread on traders, even though they advertise their products as having no fees and no spreads. With timing being the second all-important factor in any binary trade (after directionality, of course), having live, up to the minute prices in order to determine when and when not to enter a trade is the be all and end all for binary traders. For example, if you enter a Call position in a positively trending market and receive a price quote for the asset in question that is several pips lower than the actual market price, in order for your trade to expire in-the-money, not only does the value of that asset have to rise above the actual market price at the time the trade was entered, it also has to out-perform the differential between the price you were given at entry. This makes it statistically far less likely for your trade to expire in-the-money. This is not a concern with regulated brokers. Regulated binary brokers are subject to independent, random, on-the-spot platform tests, ensuring that they are offering transparent prices across all assets and that there is no latency whatsoever between the prices being quoted on their platforms and the real market value of those assets. This is just one of many fair trading guidelines that regulated brokers have to meet in order to be allowed to offer their services to the public. It is also one of the main reasons why trading with a regulated broker is of the utmost importance.
Another reason that trading with a regulated broker should be at the top of your priority list is dispute resolution. Without a body to oversee the business operations of the binary broker you have opted to trade with, you as a customer have no recourse should you find yourself in a situation where you have to file a dispute. Unregulated brokers act as judge and jury whenever a dispute is filed against them, whereas regulated brokers have to answer to the organisation that granted them their license. This organisation is tasked with scrutinising every single dispute and determining whether the broker in question behaved lawfully or unlawfully in the given instance. Essentially regulation means that there is an independent body between you and your broker, looking out for your interests, making sure that everything is always above board, and that youâ€™re being treated fairly.
Who is and Isnâ€™t Licenced?
Internet marketing being what it is, it can be extremely difficult to discern whether or not what you are reading online is factual. The line between information and advertising is stretched extremely thin on the World Wide Web. This is why most binary brokers today claim to be regulated. Often enough the claim itself is that that is required to convince a prospective trader that they have found a reputable broker to invest their money with. Are they lying? No, not all of them, but there is a great deal of liberality with the truth. So here is the regulatory lay of the land as far as binary options are concerned.
At the time of writing there is only one European body regulating the trading of binary options. This body is CySEC (the Cyprus Securities and Exchange Commission), which on May 3, 2012 announced a change in policy regarding the classification of binary options as financial instruments. Banc De Binary was the first binary options brokerage to be regulated by CySEC in January 2013 (License No. 188/13). Since then, a few other brokerages have followed Banc De Binary’s route to regulation, but by no means all. You can view the entire list of licensed Cyprus Investment Firms (CIF) by clicking on the relevant source below. Many brokers have filed applications which are currently being processed by CySEC but as of yet Banc de Binary is the only one to be fully licensed within the E.U. It was also recently announced that Malta is to be the second E.U nation to regulate binary options. At present binary brokers based in Malta come under the auspices of the Maltese Lotteries and Gaming Authority but this is all due to change and as in Cyprus binary options are soon to be regulated by the Maltese Financial Services Authority. Again many brokers are applying for licenses in Malta as well; it has been speculated that OneTwoTrade is likely to be the binary broker to be regulated by the Maltese Lotteries and Gaming Authority.
The U.Kâ€™s Financial Services Authority has recently been dissolved and replaced by two new bodies; the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Binary options now come under the FCAâ€™s authority. Many firms are currently applying for FCA regulation but of the brokers solely dealing in binary options, currently only Banc de Binary is registered, this by virtue of the EEA approval accorded to it through its CySEC license. Cedar Finance was previously registered but is no longer authorised. A number of other binary brokers are claiming to have received U.K regulation, but these are regulated by the Isle of Manâ€™s Gambling Supervision Commission and not a supervisory body specialising in financial products.
Binary options are are only just starting to be formally regulated in the United States. The brokers who are seriously pursuing regulation have now withdrawn from the U.S market as they await rulings by the U.S Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). Many rogue brokers continue to offer their services in the Unites States; but this is in contravention of U.S law and these companies run the risk of operating in a legal grey area.
2012 Forex Industry Report:
FCA Financial Services Register: