Guide to Choosing a Binary Options Broker

1. Introduction

As trading in the financial markets becomes more popular, it is part of the natural progression for products and offerings to evolve. New virtual markets are created. When new financial markets evolve too quickly, sometimes it’s hard to keep track of the sustainability and reliability of those products. Binary options is just such a market. The emergence of binary options is a phenomenon in the same way as Forex was- a true market explosion that is nowhere near maturity. Believe it or not, binary options have only been around since 2008 when the Securities and Exchange Commission (SEC) approved this form of online trading.

It goes without saying, that with the emergence of new markets come handfuls of new brokers offering the trading product. Often unregulated these binary options brokers are an unknown quantity. If you value your money then you would be right to be wary of the unknown. If you are new to trading in the financial markets, this can especially lead to confusion. Binary options trading can be extremely rewarding for professional traders and newcomers, however, how do you know which broker to deal with and who can you trust with your money? What trading platform should you be using?

These are some of the basic questions that you will need to confront before you take the plunge in the exciting world of binary options trading. Adding to this confusion is the amount of information or misinformation that can be found on the internet posted by disgruntled traders or even competing brokers! So how does one distinguish a reliable broker from hundreds of other firms that are out there on the web?

In this guide for selecting the right broker for your trading activities, we’ve identified various factors that a trader should consider before contemplating which broker to trade with. Some of these factors are:

  • Regulations
  • Company Capitalization
  • Trading Platforms
  • Broker Types
  • Customer Services

2. Regulation

In the Forex Market, for a lot of traders, trading with a regulated broker is often the most important factor when opening a trading account. By the way, some markets or regions are unregulated meaning you may be better off with an unregulated broker if you are based in those markets. Sometimes, like in the US with their strict NFA regulation, trading can be no fun at all. Leverage offered is very low and highly regulated brokers can offer very low spreads. Also, just like in the case of MF Global who recently were all over the news, being regulated does not necessarily guarantee the safety of your funds. Nevertheless, how a broker is regulated depends on where it is registered and where its base of operation is. This can be a complex issue especially when you are dealing with a global market. The financial market is largely an Over The Counter (OTC) market and this makes it difficult to subject a particular company to a specific set of regulatory framework.

Although this is a complex issue, one mustn’t ignore the importance of having a financial regulatory framework governing the operation of a broker. This is because most retail traders or investors are unlikely to conduct their own research into the feasibility of investing in a particular investment vehicle. With the fees or commissions that are paid to the brokers by the investors, many investors actually feel that this is part of the broker’s obligations. In short, the broker is supposed to act in the best interest of their clients. However when the broker is also the Market Maker, ie. taking the other side of the trade, this isn’t always the case.

In the United States (U.S.), brokers are self-regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization of the brokerage industry and the Securities and Exchange Commission (SEC). For those brokers that are based in the United Kingdom (UK), the task of regulating brokers falls under the ambit of the Financial Services Authority (FSA), a quasi-judicial body. Individual member states of the EU have their own respective regulatory bodies that follow the recommended legal framework standards established by the European Union. ֲ These are the main regulatory bodies that monitors and ensure that brokers are held accountable to a fiduciary standard.

In a perfect world, the above scenario is supposed to be the case. Unfortunately, the global financial crisis that resulted from the collapse of the U.S. subprime mortgage market in 2007/2008 is a stark reminder that financial regulations are not everything for the protection of investors.

Binary options is different. Every week there are ten new brokers popping up. 95% of all binary options brokers are unregulated. The regulated ones are usually based in Cyprus and so regulated by Cysec with registered offices in the BVI. So far I have only come across a handful of regulated binary options brokers in the whole market and those are not necessarily the best companies I’ve found to trade with by far. So it seems that in this market, regulation is not one of the governing factors to choosing your broker. So what is?

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