Trading binary options in the US is a bit of a Holy Grail for the industry, or rather, for those industry participants who are unable to break into it. Indeed, while its potential is truly outstanding, the US binary options industry is heavily regulated and therefore an extremely tough nut to crack for all brokers who have settled their regulatory status outside the US. Such brokers (which – for simplicity’s sake – we’ll call “CySEC brokers” from here on out), operate on a completely different business model than the one which can be approved by US authorities.
The US binary options business model
In order to understand why binary option trading is the way it is in the US, one needs to understand how CySEC brokers work. In a CySEC brokerage, the broker is the sole market maker. What that means is that the broker is the one who sets the prices and who in essence trades against its own clients. This is the fundamental conflict of interest that the US authorities will simply not stand for. One cannot be the sole market maker of a proposition in which he is in fact one of the interested parties. US brokerages don’t work like that. If you are a trader based in the US though and you’re itching to trade at a CySEC broker, you can do so. There are a handful of operators out there who offer such services to US-based traders, but it has to be noted that such operators are not only not licensed in the US, they actually operate outside US law by soliciting US clients. Trading with such brokers carries major risks for several reasons.
So how do US-regulated brokers operate? While there are only a handful of them out there, US brokerages aren’t actually brokerages in the proper sense of the word. Rather, they’re exchanges, and that pretty much explains their MO too. At an exchange, there is no single market maker. Some US exchanges have opted for the pure exchange model, which means that every single one of their trades is a market maker too. Such exchanges may have problems with liquidity though. CX is such an operation, and because of liquidity issues, they only offer a few tradable assets. Their business model allows CySEC operators and technology providers to make the jump to the US market though. From a technology-perspective, this move is a rather radical one indeed, as it can take quite a bit of time to convert a trading platform from a CySEC based one to an exchange-based one.
Another US operator, NADEX, has gone for a hybrid model. They have two market makers instead of letting everyone be a price-maker. This way, they can work around CX’s liquidity-related problems, but the integrity of the exchange-based mode is somewhat compromised.
Trading binary options in the US with regulated exchanges
As said above, there are only a handful US exchanges where traders can engage in binary option trading. These exchanges are NADEX (the North American Derivatives Exchange) Cantor Exchange (CX) and possibly the CBOE (Chicago Board Options Exchange) which also offers binary options, through one’s traditional trading account.
The advantages of using these exchanges are obvious. They’re fully regulated, and the business model is a fair one. Instead of going up against the “house”, traders will trade against each-other. The operator gets its money in the shape of commissions and spreads. By far the most popular US binary option provider is NADEX. NADEX have plenty of liquidity and more than reasonable number of tradable assets. They also have a number of features which make the trading of complex signals easy and potentially very profitable.
Cantor Exchange on the other hand, offer great solutions to technology providers and a gateway for CySEC traders to the US market. Through the platform offered by CX, CySEC brokers can set up shop, and they can launch white-label solutions which can be re-sold for branding purposes. While a few of the biggest CySEC technology providers have already launched CX-based operators, one of them has already withdrawn. The technological challenges are massive and the margins may not be as big as they are in Europe. The bottom line is though that several other technology providers are now looking to launch their CX-based operations and that more are considering to have a go at the US market. At CX, such technology providers are free to come and go as they please.
The bottom line
While they’re primarily focusing on US-based traders, operators like NADEX are open for traders from other countries as well. Those who appreciate the extra safety and reliability offered by US regulation, are welcome to join them. As said above, some of these brokers offer superb features for the trading of certain signals, so that’s another reason to consider them.
US binary option trading is a zero-sum game (save for the commissions/spreads cut by the exchange of course). What one trader makes, another trader loses.