The following is a guest post about the Japanese Binary Options from Takashi Ozeki. The goal of the post is to inform readers about the differences between binary options market in Japan and the rest of the world. The article reviews the different elements of binary options trading in Japan and how it compares or contrasts to products being marketed elsewhere.
Are Binary Options in Japan really Binary Options?
There are about six FCMs selling binary option in Japan now. They call it High-Low Binary Option. For FX brokers and providers seeing the interest in BO in Japan and how it is really gaining popularity and thinking “we must go there and sell our BO, we have an excellent BO system!”
Wait a minute! What you call binary options is not really the same as what they call in Japan. Let’s see in detail.
Time Frame – Most of European or American BO models don’t have any specific time punctuation towards the expiry. A price is shown that investors can trade on it with an expiry period of the option. While in Japan, most of HLBO models have two time frames. One is the purchase period (example: 10 min) when they can purchase a “ticket” of HLBO and the other is the observation period (example: 10 min) which follows the purchase period and they can no longer purchase the ticket. It is similar to horse racing where you can buy a ticket until the race starts. Once the gate is open, you cannot buy any more.
Open Value – In much of the world, after a position is opened, a two way price will be shown and traders can more or have the opportunity to sell and close the position until the expiry. In Japanese HLBO, you cannot. Once you purchased a ticket, you have to enjoy or cry over the result.
Neutral behavior on expiry – In Japanese HLBO, you have strike price which is the start price. If the start price becomes the strike price on expiry, the phenomenon is neutral. Some brokers take all the premiums, while others refund them all. Which method is more fair?
Frequency – the shortest period for HLBO is every 1 min. In this aspect there are some overseas option brokers that offer a similar product. So in this regard Japan is not unique.
Pricing – Most of Japanese HLBO premium is set before the purchase period starts except one broker. This can be a significant impact on your book. It is actually the “odds” of which the broker takes the risk. Imagine if the market keeps trending one way and most of investors keep on betting on one side, who wins, the broker or the investor? The brokers can’t hedge market unless you provide the same model to them. As such, the NADEX model doesn’t work for this. Maybe something like what several foreign binary platform providers offer may work for the model but not the price. One of the Japanese broker offers the price, 2.0 times flat on High and Low side ignoring the market momentum and spot movement. Some say there is a pricing model for this but I doubt it. At least until the pricing model is disclosed, I will not believe that.
In horse racing the odds is fixed after the purchase is closed. The owner doesn’t lose anything. It is just the redistribution of the premium after taking the commission and tax. However, in this model the broker fixes the odds before knowing the final ratio of bidders on each side. The broker is always exposed to the net premium payable or receivable uncontrollably. There is only way to control it but it not’s perfect. That is to call “Tickets Sold Out”. If you think you are going to lose in the next session, then you can shut the ticket window.
Risk measurement – Usually you can find out delta, gamma and vega in option models. I am sure you can find them in the ordinary binary option models, but you can’t do this in the HLBO.
Two brokers of the six FCMs in Japan are IG Markets and Saxo Bank. Their models stick with the professional idea and carefully designed not to be misunderstood as betting. I believe they are Binary Options. If you are familiar with the difference of the betting and the financial market (derivative) products, you know what the problem of the other Japanese HLBOs are and well realize the difference between what you call BO and what Japanese call it.
In my observation, what they call HLBO is very close to what the European markets call betting. This is why it is very popular in Japan. If your binary option model is similar to Saxo’s or IG’s, then you should be careful. In my personal view, HLBO is not “Option” at all. Then what is it? Is it a betting? (I don’t want to answer that)
At the moment, Financial Futures Association of Japan (FFAJ), which is the equivalent to the NFA in the US is holding a working group having about 15 brokers who are either selling this or planning to sell, discussing how this can be acceptable by JFSA, and the issue of whether HLBO is gambling or not as well as other topics. We may be able to see the final judgment around March 2013.
Mr Ozeki, is a veteran of FX trading in Japan who started his career with currency options broker EXCO Japan & Singapore in 1990 and has worked at Himawari Securities, Traders Securities and FXCM. He also has been a regular poster on ForexPress.com and has published two books on FX and margin trading.