The recent rise in binary options trading has paved the way for many clones or ‘White Label’ binary options trading platforms. The popularity of binary options trading is largely due to their simplicity in comparison to forex and the fixed risks. So unlike forex, where you the trade is supposed to set your own stop losses and target levels (besides figuring out your own risk), binary options takes the complexity out of the equation.
You simply place a CALL or a PUT option, decide how much you want to invest (risk) and you know how much profits you can gain, with the additional aspect of time factor (known as contract expiry time).
So when there are so many binary options brokers vying for your money how does one filter the junk from the legitimate binary options brokers?
The Binary Options Business Model
Its surprising that doing a background research on a binary options broker can save you from getting scammed. Look around various forums and there are many complaints about binary options brokers withholding their customers money and so on.
So why does this happen?
To understand how the scams operate, traders should realize the business model and how these so called ‘brokers’ operate. Did you know that you could start your own binary options whitelabel with under $50,000 and get your business started in a few weeks time?
It is this simplicity that has given rise to just about any hotshot with spare money lying around.
The binary options business that we see is largely a spin-off from the older traditional ‘Options market’ which is a derivative (aka derivatives market) and is regulated. Thus, placing an option trade with NADEX is quite different from the many ‘white label brokers’ that one comes across today.
In this retail model, the truth is you are trading against the ‘house.’ In other words, the binary options broker offers you the price feed, you select to CALL or PUT and risk your money. When you win, the broker owes you (probably 75% of your risked amount) money. Evidently, a broker would not be able to survive if you or most of their traders consistently win their options.
Understanding this basic factor should help you minimize how much you want to invest/risk with a particular broker and if indeed they will pay you the winnings due to you.
Regulation in binary options
Lately, we have seen some of the binary options brokers advertising their CySec licence. While this might put them in a better position than most of their competitors, a licensed binary options broker is just as risky as trading with an offshore, unlicensed binary options broker.
To date, there hasn’t been any news of a trader filing a complaint with CySec and the regulatory body intervening to resolve the issue. Thus, even if a broker is licensed, there is no guarantee that the broker is legitimate and is still prone to the temptation of fixing the price feed and/or retro-actively changing their terms and conditions to go against you.
The Bonus Trap
Close to 80% of the complaints you hear about a binary options broker from traders are those related to the broker not allowing the trader to withdraw their funds. Scratch the surface and most such complaints arise due to the ‘bonus trap’ where the broker gives you a bonus when you make your first deposit but requires to trade 10 or 20 times the bonus amount in volume (or number of trades). So if you deposit $200 and get a $100 bonus, chances are that your $200 deposit is locked up until you make 2000 trades or more.
This information though is usually found in the fine print of the bonus terms. There are also instances when a broker credits a bonus despite the customer not asking for one.
The price feed
Another common area of debate is the broker’s price feed. We often come across complaints how the broker’s feed doesn’t actually reflect the market price despite the broker claiming to use a Reuters price feed for example.
This is both true and false. The truth is that the broker in most cases would indeed be using a reliable price feed. However, in binary options, the market price is an average of the current market’s bid and ask price. Thus, while the markets might show a EURUSD price as 1.3256, your binary options broker would offer you of 1.3257. This is because the price of 1.3256 is the ask price, whereas the bid price would have been 1.3258 (a different of 2 pips). When it comes to contract expiry, every pip matters and this is where the issues arises.
Of course, it is a different story in regards to the bid and ask price. If the price feed comes from a larger liquidity pool, the chances of the spread being much tighter is high when compared to the broker using a below average price feed where the spreads can be wider thus leading to price discrepancy.
Protecting yourself against binary options scams
Given the above.. and many more how does a trader protect themselves against potential frauds?
Firstly, make sure to read up on the binary options broker’s website, especially the ‘About Us’ contact details. If you like what you read then by all means go on to read about the finer details such as their price feed, minimum deposit, bonus terms and conditions. Do make sure to check on the broker’s address. Most binary options brokers tend to operate a virtual office while their marketing teams are based elsewhere.
Get in touch with support team and speak to a sales rep and try to get hold of at least two contacts. Have them email you the details of the terms and conditions/guidelines governing your account with them. Be sure to also touch upon data privacy (which is essential when submitting documents for account verification).
Start with a small or minimal deposit amount and decide if you wish to claim a bonus or not. Again, in this aspect always have it on record that the binary options broker acknowledges that you do not want to receive the bonus.
Over a period of time make sure to build a good rapport with the broker thus ensuring any issues you might face are being taken care of. Occasionally you could even alert the broker towards any impending issue with a trader that you come across on a forum and question them, so at least they know that you are aware of whats happening with the broker.
To conclude, the above points only highlight some of the many issues to help protect yourself against scams from binary options brokers. You can also check our list of binary options brokers with whom we have built strong professional relationships thus ensuring that when you sign up with any of our listed binary options brokers, you have some level of security. While the above help, do remember that there is no guarantee. If a broker decides to wind up shop overnight and run away with your money there is no stopping. So tread with caution and always be on the alert.