Along with much of the online trading industry, we have spent much of the past six days sorting through the rubble of last week’s Swiss National Bank (SNB) decision to remove the EURCHF 1.20 floor it was defending, and the havoc it wreaked in the Forex world.
However one noticeable absence from all the talk was the Binary Options trading sector.
No mention of troubles at any Binary Options brokerages. No mention of Binary Options traders being caught by surprise and being wiped out. No flood of press releases from Binary Options brokers stating ‘we’re OK and still well capitalized.’
It has been very much business-as-usual in the Binary Options world for both traders and brokers.
Simple – for brokers and traders alike, any specific Binary Options trade’s gain or loss is predefined and limited. You make or lose just as much for a 20% move in a currency pair as for a 0.01% single pip move.
We’re pleased to get more of the Binary Options industry’s perspective of the Swiss Franc crisis and aftermath from Pini Peter, Chairman of leading binary options platform provider SpotOption.
LeapRate: Hi Pini, and thanks for speaking with us during what must be a very busy time for you and SpotOption. Please explain to us the difference between an FX trade and a Binary Options trade, from a risk management perspective.
Pini: With a spot FX trade, spread is variable depending on what is offered by liquidity providers at that particular time. Therefore, if there is a vast and unexpected change in supply of one of the pairs in any particular open trade, or if, as happened on Thursday last week, the parameters by which one of the currencies is traded is changed by a central bank, the entire trade changes, thus exposing traders and brokers to negative balances.
Even with a stop-loss feature, protection is not guaranteed during spikes, as the automated system cannot handle the abruptness of the action. Brokers and traders can find themselves susceptible to risky situations that they never imagined possible, especially with the normal to low volatility in today’s market.
However binary brokers and traders are not influenced by spikes, spikes are irrelevant to them.
In a binary option, the spread does not play a role in the outcome. The outcome (profit or loss) is the same whether the asset price moved by a single pip or by 25%. The profit and loss is known from the onset of the trade, exactly how much they stand to earn, and how much they stand to lose upon the expiry of the option. Traders know this, and brokers know exactly their exposure upon trades taken on their system making ‘worst case scenarios’ a known amount at any point in time, and therefore much easier to deal with and to plan for.
Perhaps these kind of incidents as we saw last week will turn the heads of both forex traders and operators more into the binary market, as it is definitely the safer approach to trading.
LeapRate: SpotOption provides liquidity for a number of binary options brokers via its partnership with CySEC-regulated market maker SpotOption Exchange . How was binary liquidity on Thursday and Friday?
Pini: Since the price of all currency pairs (including EURCHF) was always known, even after the big step-moves made by the EURCHF, Binary liquidity offered through the SpotOption Exchange system was never really affected. Traders were constantly able to trade.
We didn’t have the problem of many traders being ‘stopped out’ all at once, as the Forex world did seeing a liquidity panic even once the EURCHF found sounder footing. Part of the problem the Forex world had and had to sort out was what price traders were stopped out at. In Binary trading, the outcome in any trade is fixed from the outset. It makes no difference if the EUR is slightly down on the CHF or vastly down, the outcome is the same. That makes it very easy for both brokers and traders to manage their risk, and for the liquidity provider to keep things in check.
LeapRate: How do you see the online trading industry changing after last week’s events? Will more traders turn to binary trading?
Pini: Yes, absolutely. And not just traders, but Forex brokerages too.
I think that those looking to trade, as well as those looking to start a new brokerage, will look at Binary Options in a very different light now.
Moreover, we expect to work with even more Forex brokerages looking to add regulated Binary Options trading for their existing clients. We believe that Forex brokerages will now view offering Binary Trading as a much lower-risk way of engaging with clients.
And although we’re all focused right now on high volatility after what happened last week, another benefit of binary trading is that it remains attractive during times of low volatility, when Forex traders typically go away and trading volumes dry up.
Besides the low risk factor, binary traders don’t need to be experienced traders, opening the market to a much larger target audience. Both in high volatile markets and low volatile markets, all it takes is a simple pip to create safe gratification for trader and operator alike.
I’d also like to take this opportunity to express my vote of confidence in those forex brokers affected, as I’m sure they are handling the matter with as much professionalism and aptitude as possible. Unexpected challenges can occur in any industry, and we wish them luck and success in using their preparation and abilities to meet this incident.