Finding a Worthy Broker Is Harder After the Cyprus Crisis
Does anyone out there have a binary option broker that they sincerely love, let alone trust with their money? The task of rating these “newbies” to the trading world grows more difficult with each passing day. New brokers are popping up like mushrooms on a rainy day, singing their own praises, as if trust could be earned with a clever phrase, rather than performance over time. Every newcomer also seems to be in some far off, exotic tourist location, hardly an indication of their competence with money or markets.
What do We Know for Sure?
We already know that trading binary options is now the fastest growing sector of the forex market. Quick returns and simplified trading protocols are cited as the reasons, but finding a broker can be hazardous to your health, much more so than finding your traditional forex broker ever was. These guys are riskier than you might think, especially after the events that transpired on the Mediterranean island of Cyprus in April of this year. Banks were closed. Customer deposits were seized, and a final reckoning has yet to occur. Finding a worthy binary options broker suddenly requires deeper due diligence.
If those events did not get your attention, then how does throwing darts at an ever-expanding list of broker participants grab you? A new broker enters the fray nearly every week, and none of these new entrants, as if by some hidden agreement, ever reveals very much about their personnel or inner workings. Independent informational websites, like ThatSucks.com (former BinaryOptionsThatSuck.com), have sprung up as a result to help the unwary trader in his search. The obvious question is why is this process so difficult?
Why are these Binary Options Brokers so Different and More Risky?
The answers to these questions may surrise the newcomer and even a veteran or two. Your search begins when your forex broker informs you that he does not offer binary options, nor will he in the near-term future. This situation is gradually changing, as the more-highly capitalized forex brokers in the industry are accepting these options as more than just a passing fad. The challenge for them is that this type of trading instrument requires an entirely different approach in the back office.
No positions are actually bought or sold in this market. You literally are betting the spread, so to speak, in a fashion that is closer to pari-mutuel betting at a racetrack – as you get closer to “race time”, or the expiration point for binary options, the odds change, as the “House” manages its betting book to its advantage. A feed from Reuters is the final arbiter on all bets, but you can be sure that the House will win. Professionals that can handle this type of betting action are usually in far-flung tax havens or islands in the Caribbean where tourists are drawn to casinos.
And What about the Lack of Competent Regulatory Oversight?
These casino destinations typically do not have active regulatory commissions, or if they do, their objective has more to do with collecting taxes for the local government than with protecting your account balances. A decade ago, officials in Cyprus perceived an opportunity. It joined the EU in 2004 and quickly advertised itself as a near-perfect financial center. CySEC, the local regulator had its hands full with banks and was perceived as lax. Forex brokers flocked to the island for low-labor cost reasons and flexibility. By 2013, over 80 licenses had been granted to both forex and binary option brokers.
Unfortunately, the two largest banks in Cyprus had lost heavily on devalued Greek bonds. Officials stepped in, closed the smaller of the two, and gave 47% haircuts to deposit holders over 100,000 Euros. Brokers that did not keep client deposits offshore in Tier-1 banks were adversely impacted, as were their clients. The joke, if there is one, is that the biggest losers were Russian money launderers, who will undoubtedly end up owning the bank when stock certificates are issued.
The Lesson – Risk comes in many forms. Do not accept website platitudes that claim that management is focused on protecting your deposits. Make sure your binary options broker segregates your funds in offshore Tier-1 banks or you may be at more risk than you think. Remember that you are always your first and last line of defense when it comes to risk prevention.
About the Author
Article provided by Forextraders.com. Formed in 2009, Forextraders.com has been a great source for further reading on binary options, Read more at http://www.forextraders.com/binary-options.html