Binary Options – Where Does the Money Come From?

The overall financial market is made of the total number of financial products available to trade. When you read a news in the financial newspaper, stating that the financial markets were in disarray following a central bank’s monetary policy report, think of what the term “financial market” means.

Any financial product part of the financial market is subject to supply and demand laws. For example, if you trade a binary option based on a currency pair, the changes in prices appear on the so-called interbank market.

However, not everyone can access this market. There are multiple reasons for that. The most common one is insufficient funds.

As such, brokers appeared. In return for a commission/fee, they grant access to the interbank market. In the case of the Forex market, brokers even give a “loan”, in terms of the leverage offered.

Is the Money Safe with the Broker?

Unfortunately, the binary options industry is plagued with crooks. Few brokers have their businesses regulated by financial authorities.

The problem with regulation, from a broker’s point of view, comes from the costs. It is expensive.

Unregulated Brokers

As such, to avoid “unnecessary” costs, most of the binary options brokers look for the easy way to do business. Why having a financial authority regulating your business, when you can simply register the activity in an offshore?

When this happens, the risk belongs to the trader only. The broker takes no responsibility.

Moreover, there’s no authority to answer to. Still, the question remains what happens with the deposited money?

The answer is plain simple. Nothing. Brokers use a software that “copies” the market moves. They simply show quotations.

In the meantime, they use the deposited funds to fund their activity. Therefore, brokers offer “unrealistic” bonuses and then tie them up with unrealistic trading volumes. They make their clients’ mission impossible to win.

Anyways, the funds were used for other purposes already. That’s the reason why these brokers will have a hard time to allow people to withdraw money. They simply don’t have it or are not willing to let the money go.

They live from new customers deposits. They don’t care about reputation at all.

Regulated Brokers

Conditions differ from financial authority to financial authority. However, a regulated broker will deposit the funds in a segregated account. Typically, this is a custodial bank.

A regulated broker will strive to retain their clients. They even want their clients to win. More trading activity means more commissions.

In fact, this is the true meaning of a brokerage house.

Conclusion

The money comes from nowhere. There’s no “entity” that pays the winners the money. Brokers simply “route” their client’s orders to the liquidity providers.

These, in turn, have access to the interbank market. The more liquidity providers, the better the quotes will be.

A successful broker strives to attract as many clients as possible. Moreover, the challenge is to retain the customers. This can only be done when the business conduct leaves no room for scams.

Again, unfortunately, the binary options business still has a long way to go when it comes to regulation and enforcing it. Until then, traders should worry more about the brokerage house, than where the money comes from in the trading industry.


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