Binary options trading is conducted every day, around the clock, via dozens of binary options brokers and tens of thousands of binary options traders. Millions of dollars and other currencies trade hands each hour, and huge sums of money are gained and lost in the markets. For these reasons and others, it is important to consider how binary options trading is regulated like any other financial transaction on an open market.
An options brokerage, depending on where it operates and where it is headquartered, has several regulations it must follow as part of its operations of accepting clients’ funds and investing them as directed. Failure to obey these rules can result in stiff penalties and fines for the options brokerage – as well as a lack of access for options traders who use that site. These regulations help protect option traders from fraud or other unethical and illegal practices and ensure that everyone has a level playing field.
This article will cover binary options regulation for binary options brokers who primarily run their trading businesses online, and how these regulations protect traders as well as the options brokerage itself.
How Binary Options Are Regulated
The entire basis for regulation for these option trading websites is the fact that binary options are financial instruments. You are trading based on the expected outcome of stocks, commodities, stock indices, and currencies, using real money; as such, most jurisdictions require some sort of oversight in order to grant these brokers permission to accept and invest other peoples’ funds.
Most of all, regulation is intended to prevent traders from being cheated by the brokerages they use to invest with. This happens one of three ways, generally:
- Financial market data are manipulated at or around the time of trade execution or expiry.
- Clients are subjected to hidden fees and/or conditions that result in a decrease in potential trading profits.
- Financial assets are made unavailable for trading transactions when it is beneficial for investors to enter or exit trades.
The first one is particularly problematic because many traders have been burned by untrustworthy brokers who manipulate market data in an effort to bilk traders out of their money. In order to avoid falling victim to this type of scam, it’s helpful to use consult a trusted source for financial data while trading so you can compare the market quotes issued by the options broker with those given by the trusted source.
Moreover, it’s essential to verify which financial data provider your options broker is using to price the binary options they offer for trading on their trading interface. If you know the source of the pricing data, you can determine whether or not the broker is using a reliable data provider and you can also consult the financial data provider directly if you have any concerns about a specific expiry rate for the underlying assets of binary options that you have invested in.
Binary Options Regulation: Regulating Bodies
To keep the peace and keep brokers honest, regulating bodies have authority over all financial brokerages in their jurisdictions. For example, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) are the governing bodies for the United States. Other ones include the Financial Services Authority (FSA) in the United Kingdom, the Australian Securities and Investments Commission (ASIC) and the Financial Services Commission (FSC) in the British Virgin Islands.
Together these regulatory bodies enact regulations that oversee the online trading brokers and their web properties that are in their respective jurisdictions.
To date, very few binary options brokers are fully regulated by the major financial regulatory bodies due to the fact that online binary option trading is quite new and its regulation has not yet been dealt with in an organized and uniform manner on an international scale. However, there are some brokers that are.
Global Forex and Futures (GFT) Ltd. UK, for example, is one online brokerage that offers 5 different types of binary options types that is well regulated. It is supervised by the Financial Services Authority (FSA) of the UK and adheres to their regulations regarding financial trading and online options brokering.
The North American Derivatives Exchange (Nadex) offers binary options on a number of financial assets and, until recently, even offered political event outcome binaries that were based on such things as who will be the next US President. These were discontinued following intervention by the CFTC, which is responsible for regulatory oversight over Nadex activities.
IG Markets, Nadex’s parent company, was offers binary trading to non-US traders on its various websites that cater to British, Australian and European traders. The firm’s activities are regulated by the FSA in the UK and the ASIC in Australia.
Gallant Capital Markets (GCM) Binary is another regulated broker that has grown as an offshoot from Gallant’s spot FX operation. This broker operates under Financial Security Commission number: SIBA/L/11/0964 associated with Gallant Capital Markets Ltd.
Those interested in speculating on the financial markets may also seek to place a binary bet using the services of a financial betting website.
BetOnMarkets.com is clearly the most established financial betting site having been established in 1999. The site operates under a license from the Malta Lotteries and Gaming Authority. Click here for a full review of BetOnMarkets’ services.
William Hill Day Trader is a more recent addition to the financial betting pack although the William Hill brand has been around for upwards of 70 years. William Hill operates under a license from the Gibraltar Gaming Commission. Click here for a full review of William Hill Day Trader.
The Importance of Regulation
In a perfect world, all online brokers would be regulated by transparent and fair regulatory bodies, however, the reality is that many options brokers operating today are not.
Many traders have simply gotten acclimated to the idea of placing their funds in the hands of unregulated brokers – this adds another element of risk to one’s trading which may already be risky enough as is, depending on one’s risk appetite.
For now, those who insist on only trading with a regulated broker may want to look to GCM Binary, GFT UK, IG Markets and Nadex, depending on where you’re located. However, the current trend seems to indicate a push towards the regulation of this nascent industry and many predict that most binary brokers will move to obtain regulation soon in order to prove their services are safe and secure to prospective clients.