Binary Options – The Regulatory Landscape
Binary Options – The Regulatory Landscape
March 9, 2012Historical Snapshot
Binary Options trading (A.K.A. Digital Options) started to become a popular trend among investors during 2008, that was the year when NADEX and CBOE added binary options to the general offering of financial instruments.
This was a defining moment so to say, and ever since binary options trading have become a welcome addition to the exchange markets with billions of dollars being traded yearly.
As opposed to traditional trading where you would have to predict the future price of stocks, with binary options you just need to guess the direction of the price change on the underlying asset. Another important difference is in the expiration dates and times. In the more traditional trading you are looking at extended expiration dates (weeks or months). With binary options the expiration dates are more immediate. We’re talking about days, hours and sometimes even minutes (although I wouldn’t recommend putting down a trade on an expiration time within range of minutes).
This is also crucial, the fully regulated betting exchanges like NADEX (North American Derivatives Exchange) which is regulated by the CFTC, you can trade binary options freely, and they allow you to trade in and out of them, as opposed to the usual cypress-based binary options brokers that will lock you into a trade until the expiry time. So, at a quick comparison level, we can see that today we have a lot more flexibility in the expiration dates. This is particularly important if we take into account the emotional traders that base their trading strategy more on instinct and less on numerical insight and fiscal analysis.
Generally speaking the binary options trading industry is an unregulated one. NADEX and igmarkets are an exception to the rule, and they don’t focus just on binary options. They have a huge range of financial instruments like forex, CFD’s, DMA trading, bonds, and so on. If you really want a good binary options broker we recommend taking a look at the table at the binaryoptionsreports home page and sorting according to preference.
Current Market Regulatory Requisites
The major regulatory advantage digital options trading sites have over other sites offering more traditional types of trading, lays in the fact that they can be certified by financial auditory and regulatory bodies, as well as gaming regulatory and licensing authorities (under fixed-odds betting). This is why is recently saw a binary options trading site with the Malta LGA logo. This seemed ridiculous to me at the time, but now I understand the business and legal considerations a bit more.
Binary Options – Fixed-odds Betting
Fixed odds mean that the outcome is pre-determined. Since binary options can have only two fixed and final results, the risk factors and revenue are known based on the amount of money deposited and traded. For this reason certain gambling regulatory authorities like the LGA in Malta or Alderney in the UK consider this type of financial betting. This has immense significance on the taxation structure which de-facto means that less tax is being paid (in most of the gambling jurisdictions).
Binary Options – Financial Regulatory Snapshot
Most binary options brokers will operate under some type of Cyprus-based license like the CYSEC. There are tens of forex companies that operate under their license since Cypress is a part of the EU on one hand, but on the other hand has a very comfortable taxation structure for offshore companies wanting to set up businesses in their jurisdiction. Others may operate under the FSA in the UK, the AFSL in Australia, or the MAS in Singapore – however Cypress is by far the leading jurisdiction for binary options regulation.
It is worth mentioning that, in some countries such as Israel and Turkey where the regulations are not as strict as in the EU or the US, no license is required by law for operation. This is a bit of a wild-west situation but surprisingly the market keeps itself in check. Binary options have enjoyed a recent surge in popularity. This has been amplified by big gambling companies that have capitalized on this new niche to diversify their income structure brought on by the continually restrictive nature of gambling legislation.
The Benefits of Having Regulation
Basically it means that the operators have to put up serious money to win a legal tender. All the little scammers and operators wanting to make a quick buck without paying the traders will eventually be left out of the game.
The customers will feel more secure because they will know they are trading in an official site which is audited by the government, and the operators will capitalize on this and never risk losing their license because they don’t want to payout.
Basically everyone will win, except the rogue operations and/or small companies with no financial backing that will be left outside of the game.
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