This is an interesting topic. I like to draw parallels to Forex when talking about binary options and this is one of those questions where that can be done fairly easily. The thing is, binary options are a relatively new industry in a world of advanced technology. Many problems facing binary options and its reputation were present in early Forex, but news did not travel as wide in those times. In some cases, the binary option industry does deserve its current reputation, in others it’s due to a lack of understanding of the instrument itself.
Problem #1: Technology.
I first launched a binary options wing of Lionstone in early 2010. I was a believer in binary options and wanted to introduce it to the Russian market. The technology at the time was not something I expected coming from a Forex broker background. In late 2013 I found a solution, which fit me and put my business and my reputation in my hands and my hands only. I am hoping that this solution and ones like it pick up as the industry grows, it has allowed me the freedom I needed to grow the business and make the user interface how I want it. This has set my solution apart from other brokers, even ones using the same platform. You can read more about my specifications in picking a platform in an earlier article.
Solution for brokers:
I am fairly sure the solution is self-explanatory. Pick your platform diligently, and make sure it suits your needs before taking it. Sometimes easy set up is not the best. Do remember that when your clients trade with you, they most like do not know who performs risk management, meaning that if there are any issues, you will have to face them directly with your client. Look for the newer technology, as speed of execution is just as important in binaries as it is in forex.
Solution for traders:
As a trader you should pick a broker that uses a stable, stand-alone platform and that the broker is independent of anyone. Make sure to also ask your broker where their pricing comes from and where you can compare it. You also want to know who is responsible for risk management, and whether the broker will be your counterparty.
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Problem #2: (Lack of) Government Regulation
Binary options suffer from the lack of government regulation. Right now, binary options regulation (outside of USA and Japan) is in a limbo zone, with regulators either feebly attempting to regulate or taking overly harsh measures into stamping out binary option brokers. This obviously creates a hostile environment, and it is ineffective at weeding out the bad brokers from the good brokers, thus giving traders the illusion that all binary options are a scam.
Solution for brokers: Self-regulation, and maximum transparency. Right now it’s easier to do this as the Financial Commission recently announced that they have added binary options to their regulatory framework. When working with Financial Commission, you as a broker can be confident that they will provide the most logical resolution if you have any disputes with your clients.
Solution for traders: Due dilligence. Think before you act, and before you open an account with any broker. Make sure to get acquainted with their origins and terms of trading. Do not blindly pick up bonuses as they come with strings attached, make sure you fully understand what those strings are. Make sure that your broker has rules set up for disputes.
Problem #3: Industry misconduct
It’s not a secret that some binary brokers are not exactly honest with their clients. This is an issue that plagues any new industry, and it’s an issue that will correct itself with time as the industry matures. I think it’s also important to differentiate between broker misconduct and trader misconduct. Traders are not always honest and brokers do not always lie. Everyone must accept this fact and maybe there will be common ground to open a dialogue.
Solution: Same as problem #2, but realistically there is no permanent and fair solution. Just like with Forex, as more brokers who are transparent and are established join the industry, traders will not want to trade with scammers and chop shops, and those will die on their own.
All in all, despite these negative aspects of binary options, I have great hope for the industry. These aren’t problems specific to binary options, these are typical problems found in any new industry getting off its feet. The binary industry still has a lot of room to grow and hopefully we will see newer and newer developments from platform providers, brokers and traders, as I believe binary options are extremely flexible.