Binary Options in Different Countries – What to Look for When Trading Them
Since the Internet started to connect more and more people, online retail trading increased in popularity. These days, anyone with an Internet connection can trade the financial market.
Forex brokers were the first one to spot the new opportunity in the retail trading market. Binary options ones followed.
Because the binary options industry is relatively new (only dates a few years back), there’s lack of regulation in many parts of the world. This allowed dubious companies to start operating as a binary options broker. However, at the expense of their customers. Inspired from the Forex retail industry, binary options brokers failed to meet the same standards.
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Binary Options Trading in Different Parts of the World
Believe it or not, in some parts of the world binary options trading is illegal. In other parts, trading these financial products is associated with gambling.
Yet, in other regions, financial authorities see the binary options trading activity as being just another financial market. Hence, it must be regulated. But, regulation comes with a cost. Usually, the costs associated with regulation are quite high.
Not only at the beginning, but also on a constant basis. When a binary options broker becomes regulated, it gets a license. However, this one can be suspended if the broker violates the business conduct. Because of the high regulatory costs, many entities try to skip the process. They set up their businesses off-shore. Then, they target traders in countries where they should be regulated.
While this is a gray area of doing business, traders fail to understand that all the risk is upon them. Like being profitable in this business wasn’t hard enough! In binary trading, traders face two headwinds. Not only they must know the direction the market will go, but also where the price will be at a specific moment in the future.
The price an option is bought at (an option can only be bought) is called the striking price. At the expiration date, a call option must have a higher price, while a put option a lower one. That simple is binary trading. Yet, being able to predict both price and time is a lot more difficult than people imagine. On top of it, brokers know that. As such, the industry is advertised as being extremely easy to profit from, and traders are hooked on incredible stories. Add to this a very small minimum amount to start with, and you’re hooked.
Choose your country below for more in-depth information
Binary Options in the U.S.
Perhaps the toughest regulation exists in the United States of America. Both the SEC (Security and Exchange Commission) and CFTC (Commodity Futures Trading Commission’s) provide regulation for binary options brokers. This is in traders’ interest. As such, before opening a trading account with a binary options broker, a U.S. potential trader must check to see if the broker is regulated.
Regulation means that the broker can operate on the United States territory. Moreover, regulation means safety for the client’s deposit. Regulated brokers must keep the deposited funds in segregated accounts with a custodial bank.
In other words, they can’t touch them and use the funds to pay other people’s withdrawals or to fund their day-to-day activity. Unregulated brokers do this. Because of tough regulation, not all binary options brokers pass the regulation conditions. However, the ones that do, enjoy one of the biggest binary markets in the world.
Binary options trading is extremely popular in the United States. It has a solid regulatory base and traders know the financial authority will step in once the broker faces liquidity issues. Both federal and state law allow binary options trading.
Binary Options in the U.K.
The most important financial authority in the United Kingdom is the FCA (Financial Conduct Authority). However, while it deals with the Forex and CFD (Contracts for Difference) brokers, it doesn’t regulate binary options brokers.
There’s a reason for that. In the United Kingdom, binary options trading is associated with gambling. As such, there’s a special, different authority that deals with it. The U.K. Gambling Commission has different rules as trading/investing and gambling differ. Because binary options trading means gambling in the U.K.
In a way, this doesn’t come as a surprise. In binary trading, brokers attract traders with so-called “amazing” returns. They offer 60% and up to 90% as the rate of return on investment. However, there’s a catch. If traders do not get the right direction and expiration date, they’ll lose all their investment. While the rate of return looks appealing, in reality, it isn’t. A professional trader would laugh at this rate.
The thing is that trading is a game of probabilities. As such, losses are part of the trading game. Any sound money management system must consider the losses that can occur. But, professional traders manage risk differently. None would risk more than the potential win. In binary trading, every trade risks 100%, while the potential return is considerably less. To put this into perspective, a professional Forex trader goes for 1:2 or 1:3 or even more risk-reward ratio.
It means that if he/she risks $100 on any given trade, the expected payout is $200 or $300. That’s in sharp contrast with the binary options industry. Moreover, binary options brokers focus on the short-term expiration date. They offer the most products and advertise the sixty-second and two-minute expiration dates aggressively. They “push” traders into these trades. Because they know chances are slim for these trades to be profitable.
All in all, trading binary options on the very short-term time frames reflects the gambling nature of it. It is no wonder U.K. authorities don’t treat the industry as an investment.
Binary Options Trading in Eurozone
Europe is different. It is no wonder. The entire European project is based on uniting various countries under the same umbrella. One of the most important pillars of the European Union, if not the most important one, is the common currency. The Euro.
Binary options brokers that want to operate in the Eurozone must be regulated. The ones that are, go to Cyprus, a European Union member and get a license number. With this license, they can operate throughout the European space. However, there are some exceptions.
Some countries have special legislation that forbids binary options brokers to operate. Those citizens will trade only through off-shore entities. But, for the reasons mentioned earlier in this article, this is risky for the trader. It implies the broker is not regulated. That is the case with traders in France, Belgium and the Netherlands. Binary options brokers cannot even advertise in these countries.
Binary Options in Australia
If you want to compare binary options brokers with Forex brokers, you’ll have a difficult time. The most simplistic form to do that is to think of the regulated brokers as the non-dealing desk ones in the Forex industry. And, the unregulated ones as the market makers. Unregulated brokers use the same principles as market makers do. They mirror the market quotation.
But the problem with an unregulated broker comes also from the territory where it is regulated. For example, a broker may be regulated to offer its services in the European Union, but will still accept clients from other parts of the world. Such a case was in Australia. About one year ago, the ASIC (Australian Securities and Investments Commission) noticed many brokers registered on other markets, offered their services to Australian citizens.
They found this unethical. As such, they stepped in and reached an agreement with those brokers. In earnest, those brokers stopped accepting Australian traders unless they obtain a license from the ASIC. As an Australian trader, make sure your binary options provider has an AFSL (Australian Financial Services License).
You don’t have to take broker’s word for it. Simply check the ASIC’s Professional registers and find out for yourself.
Conclusion
The industry is highly unregulated in many parts of the world. Lack of legislation and the relative quick spread of these products took many law-enforcement entities by surprise. As such, scam brokers flourished. They took advantage of this lack of regulation and offered services beyond their jurisdiction.
Moreover, unlicensed brokers still operate under the radar. Traders don’t know or don’t understand the risk associated when trading with these brokers. Firstly, there’s no guarantee you’ll see your money back. Like, ever. Even if traders will leave bad reviews, these brokers couldn’t care less. They attract traders with huge bonuses, but under the terms and conditions, they tie the bonuses with impossible conditions to meet.
For example, a one hundred percent welcome bonus would show in the trading account double the deposited amount. But, that’s just a number. It doesn’t stand for anything. Just a number in a trading platform. Licensed brokers run their business following a specific set of rules. They earn from commissions and other fees while keeping the funds in segregated accounts.
If something happens to the broker, like it can happen with any business, the financial authority steps in and makes sure traders will get their money from their trading account. To some up, binary options trading is subject to different rules and regulations around the world. Every broker is after traders that can afford to trade. As such, they look to operate in rich countries, like the United States, United Kingdom, Eurozone, and Australia.
However, when doing that, they don’t necessarily obey the local law. As such, making sure the broker is licensed is the first thing to do before starting to trade binary options.