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Screenshot of a breaking news alert e-mail from Q2 2017
Just two years ago, it would have been quite unimaginable that the major binary options platform providers would go to the extent of engineering their platforms to be compatible with exchange-based trading in order to enter the US market.
At that time, retail binary options businesses were being established on an almost weekly basis, all of which were brands of the major platform providers SpotOption, TechFinancials and TRADOLOGIC, conducting business on an over-the-counter (OTC) basis, full of enthusiasm for a global audience which could be onboarded from bases in Cyprus, a jurisdiction whose regulatory authority, CySec, deemed binary options a financial product.
The US government deemed OTC binary options illegal, and therefore two dedicated exchanges for binary options trading were established in Chicago, one being IG Group Holdings plc (LON:IGG) subsidiary NADEX, (North American Derivatives Exchange), and the other being Cantor Exchange.
All binary options business must by law be channeled through these two entities, therefore many binary options brands eschewed America because of this coupled to a perceived lower number of potential clients than Asia, the Middle East and Europe.
Remarkably, a full circle has ensued, as the US market has now become very much the focus of platform providers SpotOption and TRADOLOGIC, both of which have become market makers on Cantor Exchange.
LeapRate spoke to Richard Jaycobs, President of Cantor Exchange in order to gain a comprehensive insight into the drive toward the US market among binary options firms.
“One of the most interesting things is the move toward the U.S. market that several binary platform companies are making” stated Mr. Jaycobs.
“The U.S. is probably the largest undeveloped market in the world for binary options. The binary options market here is a financial market and it’s regulated as a financial market and Cantor Exchange maintains the equitable principles for all participants of a regulated market. I do think it’s going to become a globally adopted model over time” he explained.
Mr. Jaycobs agreed that the US market is the most organized, and there is no way that it can be compared with gaming. It is regulated as a financial market, and I am sure it will become a globally adopted model over time.
“I separate the binary options companies from retail forex companies. Firstly, there is no leverage in binary options. Secondly, we are launching new products outside of forex, including metals, energies, interest rates, and equity indices” he said.
As there is no leverage, going through an exchange is a means of quelling any customer concerns, because a market maker can lodge money with the exchange and there is no possible way, due to the size and type of order, there cannot be any customer exposure. Mr. Jaycobs concurs with this.
“Cantor Exchange also has a clearing house model that guarantees the financial integrity of transactions and customer funds” stated Mr. Jaycobs.
Mr. Jaycobs provided comprehensive explanations to some very poignant reasons for the drive toward the US market.
How do customers know how prices were arrived at? Is there a way to check?
Most of our prices come from traders with electronic connections to Cantor Exchange. These traders, sometimes called market makers, compete with one another for business. Over time these prices will become very competitive, which is good for clients and for the market.
These electronically connected traders frequently trade with each other. This suggests that these electronic traders have different views of the market at different times and it is a sign of a healthy marketplace.
Binary options platform provides which have engineered their systems toward compatibility with exchanges have paved the way for brands to operate in the US. Is it likely that brands will register themselves as market makers?
The U.S. is a very sizable market that is not currently trading binary options, and it’s attractive for those brands to gain a presence. Since the exchange model is the only one permitted by U.S. regulators and because Cantor Exchange is very friendly to partnering, it draws brands to our business model.
We want traders to join Cantor Exchange, we want technology vendors to supply different trading platforms, and we make our API readily available so that electronic traders can make prices on our platform.
What is the difference between Cantor Exchange and its competitor?
We have traveled the world to seek out market makers and platform providers. I have also spent a good part of my time advising firms on how to make connections to Cantor Exchange. Our team is readily available to help them make those connections. Our business model is based on bringing in partners.
Does that work on a revenue share basis?
Recently we published on our website a Referring Participant partnership program that includes fee-sharing provisions for software vendors and for those making referrals.
Beyond revenue sharing opportunities, there are also value-added products that can be offered to Cantor Exchange traders.
Over time we think there will be many value-added products where the revenue model will not involve fee sharing from the exchange, including market publications, trading analytics, and other trading tools. Value-added services will become industry-wide revenue generators.
How can I become a market maker? Do I have to go to a platform provider, or can I register directly?
There are three different types of businesses that can work directly with the exchange. First, a company may simply be a technology platform provider. SpotOption and TRADOLOGIC have signed technology vendor agreements with Cantor Exchange to provide software to traders.
The second choice is to become an API-connected electronic market participant. Both small and large traders with technical capabilities have access to our market. To stream prices into the market, all that is required is to have sufficient funds for the desired level of trading, and to pass our certification process.
Thirdly, we encourage companies interested in marketing binary options to become NFA members so that they can join our Referring Participant fee-sharing incentive program. This is a very efficient model since we pay for referrals even though Cantor Exchange has the direct relationship with the traders and handles regulatory reporting, maintains the financial accounts, and provides the trading platform.
In terms of growth, the global binary option market is huge. Regulation can be expensive, will the world follow the U.S. model?
We’ve recognized the potential size of the U.S. market and have put tremendous investment and resources into our product. Our goal was to make the U.S. model cost effective to global players.
Ultimately this investment benefits our partners and has made it virtually costless for firms to participate in Cantor Exchange. In the last few months, we have seen volumes grow 10-40% week over week and I anticipate this trend to continue as we get later into this year and next.
I also believe that the U.S. model will become adopted elsewhere in the world because, in the long run, traders will migrate to trading models that have the most integrity. Moreover, regulators will likely push binary option trading in the direction of the U.S. model.
Moving toward the U.S. model would require adjustments to be made by brands not familiar with the U.S. business and regulatory model. We’ve worked closely with non-U.S. brands, explained differences in the revenue model and emphasized that brands need to be client advocates. Client advocacy and a fair marketplace has proven to be a very good business model in the U.S.