Chicago-based derivatives exchange NADEX (North American Derivatives Exchange) was founded in 2004 as the HedgeStreet Exchange, which was the first CFTC regulated internet-based futures and derivatives exchange.
Two years later in 2006, the company had two major investment partners which were the Chicago Board Options Exchange which purchased a minority stake in HedgeStreet in February 2006 and assisted in marketing the company’s exchange traded binary options, under the “hedgelets” designation. In March 2006, Norwest Venture Partners provided a multi-million dollar investment in the company.
In 2007, UK based IG Group announced intent to acquire HedgeStreet and later in the year completed the purchase of the company.
Soon after the acquisition, IG Group renamed HedgeStreet to its current name, NADEX. The exchange has continued to major on exchange traded binary options and maintains a different stance to the range of other binary options companies in the market.
In this week’s Executive Interview, Forex Magnates speaks to NADEX’s President and CEO Yossi Beinart on the intrinsic detail surrounding NADEX’s corporate profile and direction.
Please introduce yourself, and let us know a bit about your professional background, previous industry positions and how you came to assume your leadership at NADEX.
I have been working in financial services for almost 25 years, initially involved in developing advanced trading systems for institutional investors, and since 2006 with IG group, the parent company of Nadex. After serving as IG’s director of technology in London, I returned to the US to start NADEX, a retail focused regulated derivatives exchange.
At NADEX, we introduced a wide range of exchange traded binary options, making it easier for individuals to participate in the most heavily traded financial markets, trading stock indices, forex, commodities and events. Currently, we list over 3300 different options every day and are constantly introducing new product offerings based on customer needs.
What did you intend to achieve at NADEX at the time of becoming CEO, and what stages did you implement to achieve it? Please elaborate on how you intended to enhance the direction of the exchange.
My main goal was to provide active traders with unique trading opportunities to trade some of the most popular financial markets with low collateral and completely limited risk. More importantly, I wanted traders in the United States to be able to trade these products on a fair, regulated exchange with a two-sided market and no middleman.
Exchange-traded binary options is very interesting. What is the client base made up of, and does NADEX compete in the same market segment as other binary options firms which use binary platforms provided by companies such as SpotOption, Tradologic and TechFinancials? If so, how does NADEX fend off such competition from the many white labeled, sales orientated brands using these platforms all fighting for market share?
In the realm of binary options trading, NADEX is in a different space, with a much different target audience than the firms you mentioned, so we don’t see them as direct competitors. I say this for a couple of reasons:
First, the NADEX membership base is made up of US residents and entities. As a US based regulated exchange and clearinghouse, registered with the CFTC, NADEX is significantly unlike the other firms you mentioned. We are the only legal choice for retail binary option trading in the US.
Second, the contracts that NADEX offers are substantially different from the other companies you mentioned. For each underlying asset, we offer multiple strike prices and durations, allowing our traders the flexibility to modify their position risk and risk-to-reward ratios. Additionally, with our contracts, traders are not “locked-in” to a position once they enter. With NADEX, traders can enter as well as close out a position, either to manage losses or take profit, anytime up to expiration.
These two components of the NADEX offering distinguish our exchange-traded markets from the OTC dealing platforms you mentioned, and this structure tends to attract a much more active trader.
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Please elaborate on NADEX’s technology offering. Can it be white labeled, or is it in-house only and how does its operation compare to the ubiquitous platforms from the 6 binary options technology providers?
Customers who open an account with NADEX have the opportunity to trade at the best bid or offer on the exchange opposite other members, not opposite the operator of the platform, so it’s always a fair marketplace with full transparency. Additionally, because we do not offer a white label, which many companies can hide behind, our members can always be certain they are trading on a US regulated exchange and they know where to go for assistance.
We currently do not offer a white-label version of our trading platform because our customers are trading directly through the exchange; however, we are working with several brokerage firms which will integrate with NADEX for the purpose of offering our contracts to their clients. As part of this solution, there will be several trading platforms through which clients of these firms can trade futures, forex and NADEX all through one platform. Even when multiple platforms are available though, clients will always know when they are trading a NADEX contract.
The average deposit size in binary options is around $200 for a first deposit, and the lifetime value of each client is approximately $800. This makes it a high-volume business model which requires conversion of many new clients. With the cost of acquisition increasing due to competition, how will NADEX stay profitable if it costs $800 to acquire an $800 client?
Our averages are higher than the industry average that you have described and unlike many of the companies you are referring to; our profits are based solely on exchange fees instead of how much the customer may lose trading against the house. In order to maintain customers long-term, we offer free demo accounts for traders to become comfortable with our trading platform before placing their first trade as well as numerous free educational resources for binary options trading.
How does the sales model work? Is there a high focus on Sales team and retention teams? After what length of time does a new client get passed to retention for a 2nd deposit?
At NADEX, we focus on a service model instead of a sales model. Our customer support staff is available Sunday 6pm ET – Friday 4:15pm ET to assist members with opening accounts, walking them through the trading platform and showing simulated trade examples which helps tremendously with our retention efforts. Once someone opens a demo account with NADEX, they are paired with an account manager to help assist with the process of opening their account and placing their first trade.
It is quite likely that binary options payouts will increase industry-wide to 95% over the next two years approximately. What is NADEX’s risk management model and how will this be implemented to ensure traders stay longer and to keep NADEX profitable?
Since we are operating a true market through the exchange, this statistic does not impact us and is largely irrelevant when you look at NADEX’s business model. NADEX is never taking the other side of the trade, “the returns”, and therefore the profitability of NADEX is solely based on the exchange fees we receive from our members. In fact, our products are structured in a way that allows for potential returns that are even higher than this, depending on the trading decisions one makes.
For example, NADEX binary options trade at prices between $0 and $100, with the price generally reflecting the marketplace’s valuation of the probability that the contract will finish in-the-money. If a trader buys a Wall Street 30 binary option at a price of $20 and the underlying market moves above the strike price, the price of that binary option may increase from the $20 cost to an offer price of $60. This increase would provide a potential return of 200%. Of course, the trader is also placing the entire $20 purchase price at risk on that initial trade.
At NADEX, we are not concerned about the amount being paid out to the client, because unlike the OTC platforms you are describing, we are not the one taking a loss every time a trader wins. As a result, we are more focused on ensuring clients understand the product and the trading decisions that they make, so they become better traders and therefore remain members of the exchange for longer. In addition to this, all of the contracts traded at NADEX are fully collaterized which means customers are never trading on margin, therefore limiting our risk, as well as the risks of our members.
What is NADEX’s next development for this year? Please elaborate on what new innovations are likely to be seen in the binary options industry and how NADEX can hold its niche position.
We pride ourselves on listening to feedback from our active traders to introduce new tools and enhancements to help improve the overall trading experience. We recently launched additional intraday contracts available on some of our most popular contracts like gold, silver and crude and additional daily contracts for forex binary options in order to keep up with our traders’ demands.
In the next few months we will be launching a professional grade screener to help traders find better opportunities in the marketplace and the ability to hone in on exactly what they’d like to trade.
Additionally, we’ll continue to work with legal brokers in the US in order to get our exchange linked to their back-end systems and front-end trading platforms to give their clients the ability to trade our unique binary option and bull spread products through their brokers.
Finally, we’ll continue to increase our educational efforts in order to ensure traders fully understand why NADEX is truly the secure, regulated place for individual traders to trade binary options in the United States.