Let me begin this chapter by trying to frame what you are about to read. And by framing, I am trying to put this chapter into some sort of context, and to provide what I hope will be a balanced view of the binary options market, as it is today. It is a new market, and one that is changing very fast indeed, driven by a variety of forces, some good, and some not so good.
Once you have read this chapter, some of your perceptions of binary options brokers may change. Furthermore, what I am about to write may be seen as provocative, and indeed may even offend. However, this is the way I see things right now, and I make no apology for what comes next.Perhaps I could begin with a paradox.
A paradox or simple observation of life if you like, and it is this. In the ‘real’ world, when new markets are created, and new products and solutions delivered, the companies and individuals at the forefront are considered trailblazers, pioneers and true entrepreneurs. Some become icons with iconic brands. These markets then mature, develop and expand as products and services are enhanced over the years.
In the virtual internet world the opposite is often true. New markets attract the opportunist, the get rich quick brigade. What I call the ‘cash and dash’ merchants, eager to cash in on a generally unsuspecting and gullible public. The lifecycle generally runs for three to five years, and is repeated across all markets, but particularly in those where hope is the driving force, such as making money and weight loss.
We have seen this cycle in the forex market which is only now starting to mature, but we are currently in the very early stages with binary options.Let me give an example of what I mean by this paradox between the internet and the real world. Several years ago the betting industry was shaken up by the arrival of Betfair, who introduced a truly innovative approach to betting.
Since then others have tried to emulate, what is in essence, a simple concept but one which changed the gaming industry forever. Was it a scam? No, most definitely not, and the company continues to hold its value and market share with an excellent reputation in the industry. Traditional bookies may hate the company, but the betting public love it.By contrast the binary options market is in its infancy, and in its present iteration can only be described as the Wild West.
It is a market populated by many cash & dash merchants whose only motive is to fleece the naive and unwary. This is usually done by promising unrealistic and unachievable returns. In many ways, it resembles the weight loss industry where ridiculous claims are made – acai berries being one of the more recent. However, this is not to tar every company with the same brush.
It is merely to highlight a common trait whenever a new or innovative product or service comes to market. In this section we are going to explore the underbelly of the binary broker world, and sadly it is not a pretty sight. Here we are considering that group of off exchange brokers who can best be described as ‘bucket shops’.In other words, they are quoting OTC (over the counter) products to you as the client.
There is nothing inherently wrong with this model which is common in the forex world. However, it is the associated marketing tactics which define this group and is the common denominator. It is these tactics which have alarmed so many of the regulators around the world. Therefore, let me begin with an explanation of how this group is generally structured in this market. And the first point to note it is a group dominated by what is known as ‘white labels’.
If you have never come across this term before, this means the broker is offering a platform supplied by another company, and is then rebranding it to make it appear unique. This is done by changing colors, fonts, and adding logos and minor cosmetic changes. However, the underlying product offering, the options quotes and settlements, will be identical to the originating platform.
There is nothing wrong in offering such a platform, but it may surprise you to know, a large percentage of the ‘bucket shops’ currently operating in this space are a white label of just a handful of providers.It is a relatively easy process for anyone or any group to set up a white label binary brokerage. All of the back end processing, risk and order management is handled by the white label provider.
All the white label broker has to do is attract as many customers as possible to the platform. It is relatively inexpensive, and a white label broker can be up and running in a matter of weeks.It is hardly surprising therefore there has been an explosion in the number of ‘new’ binary brokers joining the market. However, these are not ‘new’ brokers, but primarily rebadged platforms from one of the primary providers.