Toxic Order Flow Hitting Binary Options Industry

In preparation for our upcoming Quarterly Forex Industry Report, our Andrew Saks-McLeod has been preparing an in-depth look at the binary options trading sector. One of the topics discussed with executives was harmful order flow from traders gaming the platforms by taking advantage of arbitrage opportunities or hacking API’s to manipulate pricing in their favor. The questions were triggered by similar situations that have taken place in the forex market. As binary options providers operate a ‘dealing desk’ model, firms are at risk when their clients are winning too much. Therefore, traders deemed ‘toxic’ who have the abilities to take advantage of pricing are obviously a concern. Of firms that answered, it was explained that depending on how a broker operates its executions and pricing, they can defend themselves from accepting trades when an order was placed beyond existing market quotes.

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On this topic, a major binary options provider has told their broker clients that they have been hit by traders using automatic trading strategies, primary through direct API’s, to execute trades at ‘off market’ prices. Defending themselves from these orders, the binary options provider explained to customers the difficulties with these traders and that going forward such orders would be subject to cancelation account suspension.

Speaking to forex insiders about the problem migrating to binary options, the consensus was that they saw it as a sign of maturity that the sector had become large enough to attract abusive traders that until now have focused on forex brokers. In terms of legalities, depending on regulatory status, it is common for brokers to cancel trades that were executed at off market prices. However, repeated complaints from clients can draw interest from regulators.

Depending on the firm, there are different opinions on handling malicious order flow. On one hand, the customers are trying to take advantage of the pricing, but on the other hand, as a market maker, a bank/broker does have responsibility to honor their pricing and executions. To handle these problems, brokers do use ‘last look’ policies and have the ability to reject order. While this is a common and expected part of trading, ‘after the fact’ cancelations are harder to justify. As such, it will be interesting to see the response from binary options traders if order cancelations become a meaningful percentage of overall executions.

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