Is it true that binary options are moving into forex?
The fate of Binary Options brokerages has transcended beyond speculative rumor. Anyone still in the trading industry will confidently tell you that as of 2017 the regulated binary options broker, if not ceasing to exist entirely, is closing in on impending doom.
Over the course of 2016, EU regulators had binary options brokerages firmly in the crosshairs. Following on from the CySEC April circular which sent shockwaves through the binary options industry, the ESMA pushed for further and more consistent reforms. Countries such as the Netherlands, France, Denmark, Belgium, Malta and Ireland, all have, or are currently in the process, of drastically limiting the scope of activities that can be undertaken by a Binary Options firm.
One could argue that it was ESMA’s announcement of its stricter stance on the binary options trading industry that set off the catalyst for change. Functionally, the role of ESMA is not only to ensure that there is regulatory supervision of financial services within the EU, but also to spot emerging trends, risks and vulnerabilities, so that they can be addressed. ESMA is commissioned with the overarching aim of preserving the financial stability of the markets and ensuring investor protection.
In most industries a change in policy from one regional regulatory authority will cause other regions to look at the same issue and assess their position. It is not unusual for other regulatory agencies to follow suit, with political and legal realities driving this agenda. But the uniformity in this case was directed from above, as much as it was between regional authorities. The ESMA is designed for the purpose of creating “a single rulebook for EU financial markets”, it therefore intends to exert its influence on all the EU member states’ individual regulatory authorities to follow their decisions.
Simultaneous to these regulatory developments, the practice of Binary Options trading was the subject of significant bad press. The main target of allegations was on the unscrupulous and fraudulent practices, reports of high pressure sales techniques and aggressive marketing and advertising. Coupled with its rise from being the little cousin of online Forex to the mammoth Hydra-like industry in which it was perceived, it was just a matter of time before regulators shifted into action mode.
On an almost monthly basis, regulators across Europe released their public circulars that whilst not banning binary options trading entirely, significantly restricted the scope of their operations within their jurisdictions. The Israeli regulatory body, the ISA took measures even one step further to demand that brokerages can’t operate within Israel, without a license from the specific country that they are providing their trading services.
As a technology broker servicing the needs of financial trading companies, Leverate’s success team saw a significant peak in activity as BO brokers were searching for solutions. The first BO broker to approach Leverate, happened around this time last year, where both the broker and Leverate’s success team identified that the only feasible solution that would still allow the broker to maintain its operations, was to convert into Forex.
The road to Forex has not been paved with gold
Fraught with hurdles, the process of converting a BO brokerage into forex has not been easy. The two trading instruments do have their similarities; both have short trading periods, both are available online and both require only minimal funds to trade. However the differences remain to be far more significant and difficult to address.
The revenues being made by BO brokerages, while vastly varying were on average, 5 times more than those being made by forex brokers. This means that an operational frame work that could be supported with these enormous profit margins is no longer sustainable for a forex broker. The conversion to forex meant compensation models for leads have to be adjusted, a particularly significant challenge as affiliate leads for forex tend to be more expensive. Customer retention also requires a difference in focus that involves a lot more training and education. Forex is a far more complex instrument, with a wide range to make either a profit and loss, it therefore necessitates more strategy and planning by traders in order to be successful.
Considering these hurdles, numerous BO brokers are simply choosing to “milk the binary options cow” for as long as they possibly can. Though to the point where right now they have their backs against the wall. It’s a scenario where the unexpected happened, the most established BO brokers, such as Banc de Binary have been the ones to pull out completely or go underground, without any regulation. Those which have managed to survive are the brokers that even prior to these developments were at the fringes of the industry. That’s not to say that the process of converting to Forex is impossible, there are select brokers who have made the transition successfully. But they have done so, by approaching the challenge with smarts. Brokers that have been successful in making the jump have automated their marketing funnels to reduce their dependence on affiliates. They have refocused their marketing agenda as primarily being a regulated forex broker, whilst also building a stronger image as a high-brow investment tool.
Leverate reports that of the half a dozen BO brokers to contact them for solutions to assist them in transitioning, only four are still in the process. The first broker that approached Leverate, was proactive in restructuring their entire operations from the get go and that ability to reorient themselves quickly has served them well. In the past year, Leverate also formed a partnership with Tradologic, a leading BO technology provider that decided to extend its technology offerings to include FX and CFD trading.
Whilst transitioning to Forex, looks like the only available option left on the table for BO brokers, it’s an option that if taken, requires focus, smarts and perseverance to be successful.
It’s a transition that at its most essential, demands a different mindset. A change of mindset however, is not something that can be acquired overnight, even if the pressures to change are imminent.
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