Are Binary Options brokers running out of options?

This article was written by Yael Warman, Content Manager at Leverate.

That the binary option market suffers from a terrible reputation is a well-worn story, however, what is less well-known is that the industry is adapting, finding new markets and sustaining the damage wrought upon them by the unrelenting bad press. No doubt, smaller brokers are finding it tough to get by, however many are far from raising the white flag of capitulation.

Yael Warman, Leverate

Yael Warman, Leverate

With the explosion in the number of online brokers in the last six years, it’s really quite difficult to determine the general current health of the binary option market. Indeed, many start-up brokers seem to have recently shut-up-shop in the last year, seemingly squeezed out by the larger players, particularly in locations (such as in New Zealand, Israel and Canada) where regulatory bodies are coming down hard on online small financial setups who can ill afford the overwhelming regulatory requirements. We see many binary options brokerages shift their business’ focus unto FX as a way to cope with the pressure inflicted by current market conditions. On the other hand, many larger, regulated forex firms have recently launched binary options products to get in on the action, although one must wonder if they are somewhat late to the party?

The word on the street is that in developing regions where financial regulation is lax or unenforced such as in China, Africa and Arabia, many brokers are finding fertile ground to ply their trade. Most western country regulators are clued up as to the risk online trading presents to unsuspecting investors and its exploitation by fraudulent operations, so licensing barriers have become difficult to overcome. For example, to obtain a license in most European countries, you must hold at least $1,000,000 in liquid capital, even if the company obtaining the license isn’t a custodian.

To gain authenticity, small and medium sized brokers are desperate in their search for affordable regulation or at the very least, the pretense of it. Dealers domiciled in St Vincent and the Grenadines can obtain authorization to offer their online financial products from this jurisdiction that can be construed as licensing. New Zealand is in the process of closing a loophole that allows foreign financial companies to apply for Financial Service Provider Registration (FSPR) that can be easily advertised as a form of regulation. Genuine Vanuatu licensing can be obtained for a mere $18,000 US dollars, though a prospective trader would have to be crazy in the coconut to think it carries any weight. Options such as these are limited but legitimacy is a necessity. Obtaining financial legitimacy isn’t just for the purpose of attracting credibility, it’s also required to gain liquidity, banking and software licensing. However, the paths leading to this are narrowing fast for various reasons.

A quick google search for “binary options” in English comes up with many warning alerts by regulators, scam alerts and articles on the dangers of online trading. A search for the same in Spanish and Japanese reveals similar results. A similar search in Arabic, Chinese, Portuguese, Thai, Hindi and other more non-western languages discloses no such think-twice results. For unregulated binary option brokers, it would seem their future lies with their ability to penetrate developing countries. For licensed brokers, it would seem they have their work cut out for them to maintain their license as well as their trader’s trust.

While, it’s unlikely we’ll see binary options promoted as gaming due to its dry financial theme, indications of where they advertise online make it apparent it is striving to be a substitute product. It will need to achieve a clear distinction from the complexity of online forex and derivatives trading, as the straightforward call-and-put nature of binary options has a role to play on the internet. However in this process binary options trading must reclaim credibility, which unfortunately has been trashed by fraudsters and the insolvent who have fallen by the wayside. Surviving dealers probably feel the same way and will choose to stick it out until their options have, well, run out.

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