NADEX (North American Derivatives Exchange) is currently one of only two online operators licensed to offer binary option trading in the US. US authorities are very strict when it comes to regulating and licensing any sort of financial activity involving derivatives, and that’s probably the top reason why you too should consider trading at NADEX. Having to comply with very strict rules and having to be insured against every possible eventuality, is just a small part of being regulated in the US as a binary option trading platform. In order to see why a US “broker” is so much more attractive for traders than an EU-based one, traders should understand the fundamental differences between the two business models.
Differences Between EU and US Binary Option Operatorsb
Binary option brokers currently operating under EU regulation (we may as well call them CySEC brokers, because the majority are licensed by the Cyprus Securities and Exchange Commission), work a business model in which they are the only market maker. They provide the pricing on all the underlying assets they feature and therefore, in essence, they trade against their own customers. This fundamental conflict of interest gives birth to a number of awkward and downright unethical situations. First of all, such a broker trades against its own clients on its own platform, through asset-prices he fully controls. Secondly, this business model is NOT a zero-sum game. Traders can never actually be very-very successful, because if they are, they directly threaten the existence of the entity whose job it is to pay them out. As you can see, there are several things wrong with this picture indeed, and US authorities will simply never adopt it.
The US model is different, and as you will see, it’s inherently fairer to the trader as well. US “brokers” are called exchanges, because they are not brokers at all in the European sense of that word. They provide the platform where all the trading takes place, but they are not a party in the actual trading process. Instead, traders trade against other traders, and traders themselves act as the market makers. To make a long story short, instead of being under the control of a single, central authority, pricing on US binary option trades is shaped by the supply and demand dynamic. Thus, traders themselves act as market makers in the equation. What this means is that every time one buys a binary option at NADEX, another trader needs to be selling it. Traders are also free to set their own asking or selling prices for various options. The bottom line is that the US binary option business model is indeed a zero sum one. Whenever someone wins something, another trader loses that same amount.
How do exchanges like NADEX make their money then? Simple: they charge commissions on every trade. It costs traders a bit of money to enter a trade, and in case they win, it also costs them some money to exit. Those who lose a binary option trade, do not have to pay any exit fees.
The above is – in a nutshell – why US binary option exchanges like NADEX should be among your favorites.
What else should you know about NADEX trading?
With such a radically different business model, come radically different trading mechanics. First of all: US binary options are range-bound. The value of such an option is always between $0 and $100. It is within this range than traders can buy and sell these options. The Bid/Offer is what determines the actual value of every option. As soon as it’s purchased, the value of the option as well as its Bid/Ask begin fluctuating. As it draws closer to expiry, the option makes it clearer and clearer which way it’s leaning, and this will be accurately reflected in its price. A winning binary option goes all the way to $100 upon its expiry, while a losing one drops to $0. Options can be exited at any time, to lock in profits or to put a stop to losses.
What this means is that while the loss potential is definitely capped, so is the profit potential, with every single option. This can be countered through the purchasing of several options instead of just one, thus allowing the profits to build up.
Given how traders themselves are the market makers, liquidity is a major issue for US binary option providers. Thankfully, NADEX have healthy liquidity and they can therefore offer pricing and trading on an impressive number of underlying assets. What this problem means is that it is extremely difficult to start up a US binary option operation from scratch. If there are no traders, there is no pricing, and there are no trading opportunities, which means that there’s no way to draw in new traders.
Now that you understand how US binary option operators like NADEX work, you also understand why you should consider them an attractive trading destination. While it is focused on US-based traders, NADEX accepts traders from all over the world.