Binary Options – The Future of Online Trading or Just an Overhyped Instrument?

Not a long time ago, binary options were not available to all retail investors and could mostly be traded over-the-counter (sold directly by the issuer to the buyer).

That all changed in mid-2008, when the binary options market was deregulated, and the first Binary Options trading websites started to appear; from that moment, their ease of use and profit potential started to attract more and more followers. Unfortunately their new-found popularity drew in a lot of shady brokers, self-proclaimed gurus and mentors, all willing to offer their exchange of a fee, of course. All the early misconduct was made possible by the lack of control, so in order for Binary Options to attract more serious investors, the brokers and the regulatory authorities must work together and regulation in the industry must become a standard.

Regulation – Why is it important?

In the beginning Binary Options trading platforms looked more like gambling than financial trading websites. Because of that, gamblers and inexperienced traders joined the Binary craze and the whole industry looked like a poor substitute for financial investing. Fortunately, brokers and traders started to understand the need for regulation. The first and main advantage: far less scams. It is a fact that whenever money is involved, scammers are more likely to emerge. And without regulation, who is there to prevent scams and to protect a trader’s money? Nobody.  The Internet provides the best environment for scammers, think about it: if a so called Binary Options broker takes advantage of a trader’s naivety and disappears with all the deposited money, what are the options for that trader? Sue the broker? Well, if it’s a scam, the trader is not going to find the real address of the company…remember, it’s the Internet and brokers can write anything they want on their websites…Unless they are regulated!

Now everything changes: the address must be a real one; the name of the company as well; and most important, client’s funds must be kept in a segregated account. In other words, if the broker goes bankrupt, the client’s money is safe. Regulatory authorities like the CySEC (Cyprus Securities and Exchange Commission) also monitor trades and business activity to ensure a fair conduct and this eliminates a lot of the doubts that surround Binary Options, turning them into a serious trading instrument, not just some form of gambling.

Forex and Binary Options – The perfect match

At the moment very few brokers are regulated so choosing the right broker can be sometimes as difficult as trading itself and avoiding scams must be a trader’s main concern. A similar situation could be seen in the early days of Forex online trading, when very few brokers were regulated and the client was the one to suffer. Once regulation became a standard, the industry started to grow at a huge pace and almost all scammers disappeared, making online Forex trading the giant it is today. If broker regulation becomes a standard in the near future, it is highly probable that a lot of Forex traders will switch to Binary Options completely or at least start to make use of them to balance their portfolio.

And speaking of balancing a portfolio: a Forex trader can easily use Binary Options to protect himself against potential losses by hedging a Forex trade with a Binary Option. I am just going to explain the principle without going into all the details: a Forex trade should always be accompanied by a Stop Loss order. If the Stop Loss level coincides with a Binary One Touch trade, when the Stop Loss is hit, the One Touch option will automatically bring a profit. Of course, if the Forex trade is profitable, the profit will be smaller because we also purchased the Binary One Touch Option, but the investor is protected against the full loss he/she would incur if the trade wasn’t protected by the Binary Option. This is just an example of the synergy that can be created between binaries and Forex and, of course, there are many other ways of balancing one’s portfolio.

Wrapping it up

Regulation is the mandatory next step in the Binary Options industry but in order for it to become a standard, the clients have an important role to play: they have to demand it. If clients will start to move away from unregulated brokers and only open accounts with regulated ones, the fear of losing all their customers would determine most brokers to undergo a regulatory procedure (Banc de Binary, for example, recently volunteered to register with the FSA and were also one of the first platforms to receive regulation by CySec). But if the customers don’t really care, why should the brokers?

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