Most people familiar with binary options only know about trading with a regular binary options broker. This means the broker offers a wide range of options that traders can buy. It doesn't matter if it is a call or a put option, the process is the same: Whenever the trader wins, the broker loses, and whenever the trader loses, the broker wins.
This binary options trading model has two problems:. Considering the two issues described above, it is no wonder that most people trading binary options end up losing money on the long run.
Of course, there are successful traders as well that make money trading binary options, but the losing traders far outnumber the winning ones, as the low payouts offered by the brokers require a very high winning rate to be profitable. Binary options brokers make money when traders lose. However, there is another model of binary options trading that very few people know about which offers better odds higher payouts and does not create a conflict of interest between the trader and the broker.
It is called trading on a binary options exchange. A binary options exchange is a trading environment where traders can buy options from other traders, or write their own options and wait for other traders to buy them. This is very similar to trading options or futures in a stock exchange where you buy contracts from other market participants, not from your broker.
When trading on a binary options exchange, your broker is not your counterparty as it only acts as a trading environment and not as a market maker. So how exactly does a binary options exchange work?
Who creates the options and why is it better than trading with a regular broker? What if there is no liquidity on the exchange? Binary options exchanges make money from commissions.
In order to have enough liquidity at any time, the binary options exchange will allow some partner brokers to write their own options and list them on the exchange. This guarantees that there will always be liquidity available and traders can buy options at any time. But the best part is not the liquidity provided by the partner brokers, but the options created by traders themselves, and the ability to create options yourself as a trader.
Traders can write their own options, which means they can create options and sell them on the exchange. In order to attract buyers for their options, they need to offer better payouts than the liquidity providers, since the exchange will list the options with the highest payouts at the top. This creates competition between option providers and results in options with higher payouts. This competition reduces the profit margin of option writers and offers better odds for options buyers.
When the payout is higher there is a more equal playing field when both option writers and option buyers have their fair chances to be profitable. A binary options exchange offers the unique possibility for traders to write options and act like a binary options broker by selling them to other traders.
This means that a trader can turn into a liquidity provider listing his own options with the payout he is willing to offer. A higher payout will increase the chances of the options to find buyers but will reduce the edge the option writer has against the option buyer.
The advantage of writing options is the advantage of having the odds in your favor. Since an option writer can be profitable even when offering high payouts, he is incentivized to offer competitive payouts in order to increase the number of options he sells. The higher the turnover the number of options sold , the higher the chance for the statistical odds to reflect themselves in the end result. If you prefer to remain an options buyer, it is still better to trade on a binary options exchange.
There are two major advantages compared to a regular binary options broker:. The price feed will be provided by the exchange which doesn't take sides since it charges the same commission no matter who wins. The exchange model is a very new approach to mainstream binary options. Classical options exchanges such as the Chicago Board Options Exchange are not very accessible to regular traders because of the complicated contracts they sell and the high requirements.
This is why retail providers of binary options chose the broker model, since it was easier to build and very profitable. Hundreds of binary options brokers flooded the market trying to attract clients, but none of them offered something different because the broker model was the easy way to do it. Unfortunately for traders, none of the binary options brokers has created an exchange so far, although there were some failed attempts.
We hope that as the binary options market matures, exchanges will be given a chance and become the new norm in trading. Exchange-traded binary options would be the best way to trade binary options, but they are still not available for retail investors. We believe the industry will shift towards the exchange model in the following years as more and more traders will become aware of this superior trading model and this will create the demand for this new approach. Social Trading is the raising star of the online trading world, with more and more people discovering the opportunities of harnessing the power of crowd intelligence.
With new advanced platforms that allow traders to interact with each other and copy the trades of the most successful ones, this new trend may soon transform the financial trading industry forever Commodity Futures Trading Commission. Securities and Exchange Commission. March 7, Binary Options Brokers Most people familiar with binary options only know about trading with a regular binary options broker.
This binary options trading model has two problems: Binary options brokers make money when traders lose However, there is another model of binary options trading that very few people know about which offers better odds higher payouts and does not create a conflict of interest between the trader and the broker. What is a binary options exchange? Binary options exchanges make money from commissions In order to have enough liquidity at any time, the binary options exchange will allow some partner brokers to write their own options and list them on the exchange.
Write options and make money like a broker A binary options exchange offers the unique possibility for traders to write options and act like a binary options broker by selling them to other traders. There are two major advantages compared to a regular binary options broker: Where do I find a binary options exchange? Conclusion Exchange-traded binary options would be the best way to trade binary options, but they are still not available for retail investors. More articles about binary options: Commodity Futures Trading Commission 2.
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