All About Binary Options Exchanges and How They Work
For years, binary options traders were limited to choosing from a handful of binary option brokers who operated on an over-the-counter (OTC) model. But luckily, thanks in part to regulation from the US, UK and other countries, binary options trading can be done through a real trading exchange.
What Are Binary Options Exchanges?
Binary option exchanges are essentially companies acting as the platform through which option contracts can be traded on regulated exchanges. For the US, prices and quotes run directly through the Chicago Board of Options Exchange (CBOE).
The OTC broker model allows companies to profit from both wins and losses, with losing trades being much more lucrative to the broker. Binary option exchanges act merely as middlemen, matching buyers with sellers on their platform. Exchanges make their money purely through commissions. In order for a binary options exchange to be legitimate, they must be regulated by their local regulatory agency.
Here’s a list of currently regulated binary option exchanges and their regulators.
- NADEX (CFTC) – FULLY REGULATED
- Cantor Exchange (CFTC) – FULLY REGULATED
- BinarEx (CFTC & CySEC) – FULLY REGULATED
- Daweda (CySEC) – FULLY REGULATED
How Do Exchanges Work?
Most exchanges offer currencies, stocks, commodities and indices. If a trader wants to place a buy or sell order on AUD/USD, for example, they would look at available pending orders, which are orders already created by other traders that are just waiting for someone to take an opposite position.
If the trader spots a potentially profitable trade with, say, a 1 hour expiration deadline, they would place their order matching the other traders bet amount. At the conclusion of the 1 hour deadline, the winning trader collects the losers wagered amount, minus a commission from the company offering the exchange-traded contracts.
If the trader doesn’t see any potential trading opportunities that offer value, they would simply create their own order with its own stipulations on price, time, etc. An order is ‘pending’ until it a buyer is matched with a seller, and vice-versa.
Depending on the exchange being traded on, binary option traders can choose to opt out of their contract if a trade is running against them, in an effort to limit their losses. They can also capture their profits before a trade’s deadline if they’re afraid price will move against them by the time the deadline expires.
Benefits of Exchange Trading
While binary option exchanges are still relatively new the industry, there are a nearly endless number of advantages that come with trading exchanges when compared to trading OTC brokers.
- Exchanges are tightly regulated, companies have little room for error
- Generally a safer investment when compared to OTC brokers, exchange companies profit from trades being made, they have no interest in who wins the trade
- A real marketplace pitting buyers and sellers against one another, traders just need to be smarter than the other guy
- Real price quotes coming straight from the market source
- Potentially the future of binary options trading