Weighing Broker Risks: Forex vs Binary Options

“What is riskier, Binary options or Forex?” is one of the most frequent questions being asked. In this article, we will review the answer to this question for the brokers, while the next will tackle the issue from the client side. There are many claims of binary options being extremely risky for the broker, and many fear in-house Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term as a result.

Let's begin with the fact that you cannot compare two different financial instruments in terms of risk. You have to look at it from your own risk management perspective. Forex can also be extremely risky if you do not use the tools at your disposal. That is why dealing or risk management departments tend to be important for forex brokers. The fact of the matter is, that to successfully manage risk in binary options you must learn and develop a strategy that will minimize it. I will provide some tips further on how to achieve this.

Binary Options Industry Still In Its Youth

I would like to make a point that binary options is still a young industry. There are no Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term providers, clearing houses, or large pools of brokers passing on binary trades. That is of course, if you are not a white-label of some software provider. Therefore, to manage risk, you are facing trades that are cleared in-house. This is traditionally known in the Forex industry as B-booking. Now, this isn't bad by itself (it is no secret that if clients lose then the binary broker makes money and vice versa), but to do this successfully you must be transparent.

Transparency is the key to reducing client complaints, and building your reputation as a brand. This transparency should first and foremost come from pricing. Your clients should know where your pricing is coming from, but it's more important that you do and have control over it. If you don't, please read my previous article. This is the most important tool in your arsenal as a binary broker, and this is where you build the foundation for your risk management.

With transparency out of the way, here is a very basic how-to manage your binary option risk in-house.

Step 1: Collect Data

This applies to every binary broker looking to manage their own risk, it does not matter if you are established, thinking of launching or just launched. You must collect data on client trading patterns. The best way to do this, and easier done if you have not launched yet, is to offer demo accounts to your potential clients with exactly the same limits you would have on your real accounts and many instruments. This will give you valuable insight into your clients' needs that will allow you to enhance your offering.

Step 2: Analyze

This is self-explanatory. Statistics are just numbers if you do not analyze them and make conclusions. In the case of risk management you should look at least for the following things:

- Popular instruments

- Wins/losses

- Popular timeframes

- Trading periods (during news, market openings/closings etc)

This will give you a solid base to build your risk management policy, it's important to further analyze every little piece because it will determine your action during the next step.

Step 3: Basic Configuration

Now is the time to set-up your business and binary offering. Based on the conclusions you arrived at step 2, you need to choose which instruments you will offer initially. It is not wise to offer every instrument available from the start. Such a decision will expose you to unnecessary risk, and your clients as a whole won't be trading all those instruments very often if at all. After choosing your first batch of instruments you should configure them appropriately:

- Minimum/maximum bet

- Payout percentage

- Available timeframes (while you'd be unique to offer 1 second 100% payout binary options, it wouldn't be a wise choice)

Having done this, you can begin offering these binary options to live clients.

Step 4: Active Risk Management

Basic configuration will only work for a limited amount of time. The problem with demo account statistics is that they serve only to give you a general direction of where you will be going. Now is the time to actively monitor the trading occurring in your brokerage and be ready to act fast to minimize your exposure. The most basic way of doing this is adjusting payouts in real time. This can be done during periods of high volatility or low volatility depending on your goals. There is other tools in the hands of the binary broker that will allow them to manage their risk and at the same time keeping transparency (ask your platform provider). It is all about adaptation and being able to react fast, you will need dedicated risk managers to do this successfully, very much like in Forex. The problem with finding dedicated risk managers is that you will need to train them yourself, as the binary industry does not currently have a very good work pool of risk managers with experience.

All in all, it's important to keep in mind that this is a business, it is risky, but not riskier than Forex. Shortcuts and a lack of effort will be detrimental in the long run. The current negative reputation of binary options among brokers, journalists, and clients is mostly due to the limits imposed by technology and the fact that very few know how to manage risk without losing transparency. You can become a flagship broker and you can only do so if you manage your platform, risk, and instruments yourself.