First, let’s start with how the binary options are presented, and whether they are quoted as binary probabilities. The short answer is no. All of these companies quote a fixed proposition in terms of odds and time. And the reason for this is very simple to understand if we go back to our fixed odds horse race. All bookmakers are well versed in managing risk.
They adjust their odds constantly, and will lay off bets to hedge risk prior to the start of a race. Once the race begins all the bookmaker has to do is wait for the completion of the race and payout accordingly. This is a relatively simple process. Now imagine if the same bookmaker were managing the odds and risk ‘in running’. This is a very different and complex process, with the odds changing second by second as the race develops.
Small wonder therefore, this is not offered by such brokers as it is simply too complicated to manage the risk. Much easier therefore to offer a fixed odds model and market it as a binary option. To continue the ‘does it matter’ question, the second point concerns the ‘in running’ issue. At the time of writing, I have yet to find a white label broker who can offer early closure of a trade once underway.
They do not have the in house expertise to offer this facility, because they are not managing their own risk or book.Next on the ‘does it matter’ question comes transparency, or should I say a lack of transparency. For you, as the client there is none. You have no idea what price is being quoted, and have no way of checking. And given many binary options are quoted over seconds or minutes to 5 decimal places, checking is impossible.
A tick movement either way will push a position into loss, and it is remarkable how often this seems to happen just at expiry of the option. The transparency issue is a huge problem in the industry, and one that has yet to be addressed. And the issue is this.Suppose you are trading the price of a stock using one of these brokers. You have the illusion of trading the actual movement of that stock, but have no idea if the price is settled based on the actual tick movement on the underlying, since no time or sale data is available to you as the client.
The only information you have is the price quoted on your screen from your broker. Given these brokers are virtually all white label platforms, this problem is unlikely to be addressed anytime soon since it is the platform providers who will need to supply the data and charts.Furthermore, there is a second and potentially more serious issue concerning transparency, and that is market manipulation.
Whenever you take a position in an OTC contract, a conflict of interest arises. In the forex world many brokers have now moved to the STP (Straight Through Processing) or ECN model, where orders are routed directly into the interbank market pool for execution. However, many market making brokers still exist with a traditional dealing desk.
Here they manage their A and B book clients accordingly, with the winning A book customers generally passed directly through into the interbank pool, whilst B book customers (the losers) are managed in house, and subject to the well know practices of stop hunting, re-quoting, and other sharp practices.For white label binary brokers the opportunities for price manipulation are even more straightforward.
In the forex market, brokers at least have to wait for news to create the required volatility. For these bro kers time is the catalyst, and once a proposition approaches expiry, a simple change in price by fractions of a tick or pip is all that is required.Maybe you believe this is all fanciful nonsense and I have an axe to grind with this sector of the industry.
Nothing could be further from the truth, so let me include part of a press release from the CFTC which appeared in June 2013, in which they made the following comments:And what are the other two categories of alleged fraud alluded to in this release? The first is funds withdrawal, another major issue and one I will cover shortly, and the second is identity theft which is another growing problem.