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Regulated Binary Options Brokers – What It Means To Investors

What is Regulated Binary Options Broker Means ?

Regulation of the binary options market is a hot topic that is being debated in forex/binary circles. It is not illegal to trade in binary options, but is regulated in the US and investors can work only with a limited number of brokers. In Europe and other parts of the world, binary options trading is largely unregulated. Most of the regulated binary options brokers are located in Cyprus and the binary options market is looking up to CySEC (The Cyprus Securities and Exchange Commission), the most popular forex regulator, to introduce a regulatory framework.

Prior to the introduction of online trading, binary options were only available over the counter at stock exchanges and were sold directly to the buyer by the issuer. They were considered to be exotic instruments with no liquidity during the period between issuance and expiry. The Chicago Board Options Exchange (CBOE) which was created in 1973 started regulating the trades in binary options and the growing need for monitoring and controls led to the formation of the Options Clearing Corporation in the United States of America. As a result, dealers had to maintain a license for over-the-counter selling of exchange-traded binary options.

The next major step for regulating the binary options market was taken in 2007 and the rule change proposed by the Options Clearing Corporation led to the approval of listing of cash-or-nothing binary options on major markets in 2008 by the Securities Exchange commission. In the same year, NYSE Amex and CBOE launched binary options under the name Fixed Returns Options (FROs). Around the same time, online binary options brokers also started their operations. Pioneers of the online binary options trading, however, chose to become licensed and regulated operators.

Both beginners and seasoned traders find binary options to be a great trading vehicle because they are easy to understand and more straightforward when it comes to using them. Moreover, it provides the investor with complete certainty in terms both the risk and the reward involved. This has led to a spurt in the popularity of this investment vehicle. However, in order to become successful as a binary options investor, it is a good idea to work with licensed and trustworthy binary options brokers if that is possible.

Some of the reasons as to why investors should work with regulated binary options brokers are as follows:

  • Binary options trades are purchased directly from the broker providing the trading platform. It is, therefore, of great importance that the investors deal with a trustworthy broker in terms of providing accurate advice, quoting a fair price and paying them a reasonable return on their investments when their trades finish in-the-money. With regulated brokers, they can be sure of getting the best of service on all aspects of trading.
  • Regulated binary options brokers keep clients’ funds and company’s funds separately. This will ensure that the investors’ funds are secure and safe.
  • Prior to granting license to brokers, regulatory authorities ensure that the brokers have sufficient financial capital to operate binary options platforms and the systems used for delivering price quotes in real time and payouts offered for winning trades are fair.

However, the actual situation is that every week about ten new brokers are starting operations and 95 percent of all the binary options brokers are not regulated. Among a handful of regulated binary options brokers that are available in the market as of date, many are not the best companies to work with. Therefore, regulations may not be the only criteria that investors should look at when choosing the right brokers for them. Other factors such as capitalization of the company, type of trading platform (web-based or non web-based), payout offered for both in-the-money and out-of-the-money expiry, assets offered for trading, currencies supported, customer service provides, security of the trading environment, etc., are also to be taken into consideration.

There have been two notable effects because of the lack of regulation. Firstly, many investors have steered clear of investing in binary options. Secondly, many brokers have been forced to face charges of manipulation and malpractice. Therefore, there is a need to regulate the binary options market though it is not an easy task to do it on a global scale.

In May 2012, CySEC made an announcement saying that those companies that are operating as binary options brokers would come under the purview of the Investment Services and Activities and Regulated Market Law of 2007-2009. The implication of this change is that the brokerages operating in the region would be required to apply for a license as a Cyprus Investment Firm if they want to continue their activities. It also means that the regulated binary options brokers will have to file returns and provide two-year business plans as part of complying with the regulations.

As far as the investors are concerned, the segregated accounts of their funds maintained by the brokers as part of regulatory stipulations will ensure deposit protection. This will also boost investor confidence and help to bring many new investors to use and enjoy profits from this investment vehicle.

So, when it comes to choosing binary options brokers, investors should not make hasty decisions. They should not allow them to be pushed into depositing their funds with any broker immediately. They should take time and study the operations of the brokerage before deciding to work with any of the brokers. It is also a good idea to deposit a small amount to start with and test the withdrawal process. If the investor feels that the broker is a legitimate operator, then he/she can deposit more funds and continue with the trading. Investors should also test out the customer services department of the brokerage offering the platform in order to ensure that they will get the required support to execute trades successfully. Opening a demo account is the right manner in which investors can test the performance of the trading platform. For the past few months, brokers have been gearing up for the ensuing regulatory changes and therefore the chances are that at least some investors are trading with regulated binary options brokers though they may not have an official stamp as of now.

January 3, 2013: posted in Binary Options Education No Comments