Adding binary options to an existing over-the-counter (OTC) forex product line can help convert beginners as well as complement alternative offerings for experienced traders – yet a strong self-regulatory approach is needed to help ensure best-execution practices in the wake of this quickly evolving industry. That’s why the technology provider that a brokerage chooses matters.
Research shows a strong correlation of increased conversion rates when adding binary options to a forex broker’s existing offering, whether as a stand-alone product or within a multi-asset platform.
Binary options provide a meaningful way for traders to hedge or participate in market volatility scenarios without worry of getting stopped-out, as options are time-valued. Thus binary options provide an easy mechanism to diversify existing FX portfolios or for traders to take a quick speculative position.
Goals and Challenges
Just as forex trading had come under scrutiny in recent years over aspects of fair dealing and asymmetrical slippage, as well cases of fraud and market manipulation, the need for proper due diligence of technology providers is critical when offering binary options.
Technology providers must maintain high standards of commercial honor to help ensure fair dealing to end-customers, coupled with the broker’s own responsibility to its users. The same can be said for forex and CFD offerings, and any off-exchange trading instrument where self-regulatory efforts are needed, in addition to any to external regulators.
In some jurisdictions binary options are regulated whereas in others they are not yet adopted. Similar to a derivative, binary options contracts settle in cash, and thus meet the definition of ‘financial instruments’ as laid down in Section C of Annex I under MiFID in Europe. In other jurisdictions binary options are regulated under gaming regulations.
When done right, binary options can be a powerful tool for increasing conversions and higher deposits, as the hurdle for new market entrants is reduced, and making it easier for customers to try out trading for the first time.
These findings are applicable to brokers offering multi-asset products and show how adding binary options can significantly boost the number of live customers depositing – when compared with a forex/cfd-only offerings.
The reason for this is because binary options trades are pre-packaged with the trade size, profit/loss and time-duration determined in advance, so that clients simply choose either to enter the trade or not, hence the yes or no binary aspects of trading.
Simplification of Plain Vanilla Options
Unlike traditional stock and index options including American-style and European-style options – which are reserved for sophisticated investors and are highly-complex instruments, binary options are easy for beginners to understand and test-out.
The complexity of traditional stock options include detailed options-chains for prices of puts and call premiums and strike prices, as well as historical versus implied volatility levels, and other aspects that are taken into consideration by options traders.
Binary options are a simplified version of traditional plain vanilla exchange traded options, where time-value and premium risk qualities are retained as well as profit target based on similarities to the contract’s strike-price and whether the contract will be in-the-money or out-of-the-money at or before expiration.
Trade forex in the off-exchange market such as in common trading offerings requires all of those aspects to be decided on individually, and hence creates resistance for beginners.
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Reason for Improved Conversions
Having an OTC forex offering is key to keeping retention higher by enabling binary options traders to diversify and participate pro-actively in their trading strategy – instead of relying on binary options alone for 100% of their portfolio. This why forex tends to have better retention over binary options trading, whereas binary options have superior initial conversion to increase deposits and trading volume.
As beginners start to understand the nature of the markets, their representative can explain how using OTC along with binary options. This could help traders create a more balanced portfolio based on their specific goals.
Conversely, a binary options-only offering is further complemented by adding forex to improve long-term retention and provide clients with more ways to diversify. This is because binary options have imbedded profit/loss targets, and thus limit traders that seek to apply more flexible strategies such as when trading OTC FX or CFD products.
Existing Sales and Marketing
Many brokers today face low conversion rates of their demos to live, creating a hurdle for sales and marketing, as operating margins and subsequent revenues are continually squeezed.
The reason why binary options offerings work so well for Forex brokers is because a large number of new demo leads are typically from new market entrants (i.e. people who have never traded in financial markets).
Therefore, many new entrants are turned-off to the complexity of OTC trading as it requires a number of steps in planning and trade preparation when compared to binary options (such as creating a trading strategy).
Many brokers either have an abundance of leads and terrible conversion – or suffer from low ROIs even when conversion levels improve. Whether marketing is generic, or paid for, or both, time-costs and capital expenditures add up for customer acquisition – yet may still return sub-optimal results at the end of a series of campaigns.
Methods of Approach
A technology provider must be able to analyze the Marketing/CRM/Sales structure and how a broker’s current platforms and signup forms/landing pages are integrated, including the introducing brokers and affiliate links (and how this integrates with back-office and administrative related systems).
Once there is a basic understanding of any integration needs and the existing brokerage model and how to best leverage the business’ inherent advantages – the provider must produce ways to proceed based on the needs and preferences of the management or project manager, before moving to the next step.
The goal of any integration is to minimize the amount of work and time needed on behalf of the broker, in order to make adding binary options seamless – yet cover enough key elements to make the subsequent offering successful.
In addition, the products can be stand-alone or fit squarely next to existing forex or multi-asset offerings within a broker’s existing platform, whether in one dedicated product or across several platforms where the binary options can be traded.
Once launched and with the right addition to basic educational resources for clients, the improvement of conversions and subsequent cross-selling of OTC forex/CFD products could be statistically significant within 12 months or sooner.