A binary options broker is a financial agent that provides retail traders with investment opportunities through binary options. The binary options broker will either take the opposite side of the client transaction, match with an opposite client transaction or replicate the client’s transaction in the market in order to be able to pay the return in case the retail traders was right on the direction of his trade. Such replication of the position of the client is called hedging.
A binary options broker is deemed regulated if he obtained all the necessary regulators’ approvals and trading license. The most important ones are the CIF Trading license delivered by the CySEC (Cyprus Securities and Exchange Commission) and the authorizations of the FCA (Financial Conduct Authority) and the AMF (Autorité des marchés financiers), which are the toughest domestic financial regulators.
Binary option brokers end up making money on volumes
Since regulated binary options brokers don’t charge any commission, lots of binary options retail traders wonder how these brokers are able to make money.
First of all, you should see brokers as order aggregators. At any point in time, you may understand that the proportion of traders believing that an asset will rise compared to the proportion of traders believing the asset twill go down is between 40% and 60. This ratio may get skewed one way or another under certain market conditions: strong asset trend, high volatility… In the end, the ratio is always more or less 50 / 50. In these circumstances, the broker does not need to replicate the clients’ positions and just have to match it with another client that has the opposite trade.
Let’s for example suggest that one trader invested 100 USD in a High oil binary option with maturity 15 minutes and that another trader bought a Low binary option on oil with almost the same characteristics for 100 USD. The payout percentage of the option was 80% at inception. At maturity of the option, one trader will be right and the other will be wrong whatever the evolution of oil prices. The trader that was wrong will lose its 100 USD (excludind the refund or return on loss) and the trader that was right will receive 80 US. The broker thus kept 20 USD of profit with almost no risk.
Broker is not an easy job
Of course it is not that simple and most of the time, the broker will need to replicate some positions on the market and offload some risk in order to balance some positions between traders that may have different binary option maturities, strike prices and a greater amount of buyers than sellers. Moreover, you should never think that the percentage of the transaction the broker pocket on each trade is a pure profit. This is the money the broker will use to invest on trading platform improvements, trading signals proposed to retail traders, mobile applications….
It requires a lot of experience and advanced risk management tools to perform in the binary options broker industry. All our recommended brokers are known for their risk aversion and for their high standard risk control processes that keep your deposited funds safe. Don’t hesitate to have a look at our detailed reviews of OptionTime, 24Option, AnyOption and TopOption for more information.