Benefits of Exchange Traded Binary Options
There is a lot of confusion about binary options, but the simple truth is that they can be a great trading instrument as long as they are structured properly and traded on a regulated exchange. Generally, all binary option contracts share the same name, but there are many different types of them. Basically, all binary options share one characteristic: that is, there are only two potential outcomes, “all or nothing”. For many of the financial instruments sharing this name, however, that is where the similarities start and end.
Legitimate binary options trading
If you have ever had a negative feeling upon hearing the term “binary option”, maybe it is because you have heard of, or even participated in trading binary options at off-shore firms. The number of firms like this has increased remarkably over the last several years, claiming they offer “an easy way to get huge profits from a small investment”. As with most get rich quick schemes, this is too good to be true. The activities and conduct of said offshore firms has been formally condemned, and a joint fraud advisory was issued by the CFTC and SEC in June of 2013, alerting investors about the complaints they had received about firms making such outlandish claims. In this advisory they also explained what an investor should look for in legitimate firms offering binary options. But unfortunately, confusion still exists.
As explained in the CFTC/SEC Fraud Advisory note, Nadex (North American Derivatives Exchange) and the CME (Chicago Mercantile Exchange) are the only exchanges to legally list binary options in the United States. U.S. Exchanges are regulated by government agencies concerned with protecting traders and investors. They hold the exchanges to extremely high standards as part of this protection. The SEC and the CFTC are the two agencies responsible for maintaining a fair marketplace. Exchanges that hold member funds have strict requirements as to how this money is allowed to be handled, as part of the regulatory structure. This means that, in general, funds must be held in segregated accounts with highly stable and secure financial institutions. Moreover, when members wish to withdraw funds, the exchanges must provide a withdrawal process that is easy to understand and fast.
Regulated binary options offer transparency
Aside from general consumer protection, one of the main benefits of trading binary options on a regulated exchange is the transparency of the markets. Because determination of the prices of these contracts is derived from and settled against a 3rd party market, traders have complete transparency, and the exchange will provide time and sales data for verification to respond to any question a trader may have regarding a settlement. Basically, an exchange matches buyers and sellers in an unbiased manner. To avoid conflicts of interest, neither the exchange itself, nor its employees, may take positions in its markets. And, unlike some OTC firms, exchanges never set the prices or hedge the other side of your trade.
Exchanges must publish rules that are well established and clearly defined. Any rules that do change need to be approved by the appropriate supervising authorities and investors must be notified of the rule change before it takes effect. Some of the offshore firms do not do this, and in reality are operating as little more than glorified bookies, taking bets on where you think a price will move.