Having been involved in the financial industry for some time I have always been somewhat aggravated by the use of the term ‘scam’. It is often used in relation to financial products and brokers and increasingly seems to come up in relation to Binary Options.
This charge seems to have been leveled a lot against the Binary Options industry recently. In particular binary options broker scams tend to get a lot of the headlines. However it seems there is something of a misconception about what this really means.
While this post started as a rant what I really want to do is help to clarify what is meant by the term. Are there scams in binary options? If so and this really is a fraudulent industry, then how can you start to protect yourself from them?
So first let’s take a look at what the term ‘scam’ actually means and how it is used in relation to Binary Options.
According to the Oxford Dictionaries definition, a scam is described as
‘a dishonest scheme; a fraud:’
So is there any justification for the use when referring the binary options industry? Do binary options trading scams exist? Are brokers dishonest or fraudulent? Or are these claims simply peddled by those with a grievance, maybe as a result of their own inability to trade. Or perhaps even by brokers simply trying to discredit their competition?
Binary Options Scams
Although I have not looked too closely at setting up a binary options broker myself, I would hazard a guess that it is not that difficult to do. If you have looked at many of the brokers on the market today, you will no doubt notice that there is often little difference in the features provided.
This is because they tend to make use of one of three core binary options dealing platforms. - SpotOption, Tradologic and Techfinancials.
These platforms provide the ability to be ‘white labelled’ (branded), meaning that anyone with a few thousand dollars of capital can purchase the platform and with a new logo, some branding and a hosting account, launch a new broker.
Virtually each week I see yet another new broker hit the markets based on these platforms.
So does this mean that all brokers are essentially the same? Well yes in terms of trading facilities. However the trading platform is where the similarity between them ends.
Why Each Broker Is Different
Due to the largely unregulated nature of binary options, financial solvency of the broker is key. Most accusations of scam activity by brokers tend to come back to this one way or another and centre around three key areas -
- Pricing of returns
- Slow payment processing or inability to withdraw deposited funds
- Signup bonus offers
Before explaining these in more detail I should of course point out that the Binary Options industry is no different here to any other financial market place. The same charges which are levelled at Binary Options Brokers are the same as those which are used against Forex brokers, stock brokers and nearly any other trading broker the world over since the beginning of time.
So let’s next take a look at each of these areas.
1. Contract Pricing
If a broker is cutting their own ability to generate a profit by paying out too many winnings, it will only be so long before they put themselves out of business. This is why on occasion you may be unable to place a contract with a broker if the odds are too heavily stacked in your favour (a sudden market fall for example).
Also be aware that brokers will often use ‘spreads’ on contract prices. The common way they describe this is as ‘the level that the market is prepared to buy and sell the option for.’ This may of course not reflect the actual pricing of the market so you need to be careful. In particular this is more noticeable on very short term contract, such as those running for just sixty seconds. Pricing is much more likely to be manipulated on these contracts. If you want to make money on your account then these are probably best avoided.
Profits for you equal losses for the broker and vice versa. This is also why brokers tend to limit the maximum amount they will take on a single contract outcome. They simply cannot risk being wiped out by a clients winning streak.
2. Payment Processing And Withdrawals
You should always check the terms of broker withdrawals. In all the binary options broker reviews on this site we detail the brokers official withdrawal policies.
The best way to get to your funds is to always ensure you withdraw them by the same means that you deposited them. Two to five day processing times and fees for additional withdrawals are all acceptable practices. However extended delays in getting your requests dealt with are a point of concern. This can indicate that the broker is not willing or more likely, is unable to meet your instruction.
If the point is reached where client winnings exceed losses for an extended period, then the liquidity of the broker can simply dry up. If the broker has no money then it cannot honor its obligations, which includes paying you your winnings.
If this point is reached then you are going to struggle to get your hands on your funds, if at all.
This brings me onto new brokers, many of which are started with a limited budget. This I suspect means that many are under-capitalized at the outset and so will not have the financial resources to withstand losses (to the broker) from good trading clients (your win their loss) . The danger is that they can more quickly run into liquidity problems which will spell problems for you accessing your money.
3. Deposit Bonus Offers
I personally think that deposit offers are a great way to get yourself set up with a good amount to trade. However they often come with conditions attached that you should be aware of. This areas is where brokers are often criticized normally again due to a lack of understanding by the trader.
Does any business actually give you anything for free? You may think so but I guarantee that this is rarely the case. However many new traders think they can simply deposit a few dollars into a binary account, make a trade and then the following day withdraw the lot including the brokers bonus. Wow, free money! Where’s the binary trading scam? Those brokers must be really dumb!
Of course this is not the case and most deposit bonuses will require you to ‘turnover’ a set amount in your account before you can make a withdrawal and claim your bonus. The bigger the ‘free’ bonus you accept, the more you will have to trade to get access to it. This can lead to over-trading, which can inevitably see poor results. And of course losing more equals more money for the broker.
You weren’t trading with money you need to withdraw for your next rent payment were you?
Binary Trading Scams - Summary
Provided you understand the process for withdrawal, accept the fact that a broker can use spreads to help keep themselves financially solvent and that they have stipulations on their ‘offers’, then there is little that can be said to be a ‘scam’ about their operations. The only real concern is the liquidity of the broker. At best many ‘newer’ brokers are perhaps ‘questionable’ in this area.
While the binary industry is moving towards regulation under CySEC this could be some way off. It should lead to better security for client funds (segregated accounts). This should in term see less accusations of a binary options scam and an all round better experience for trading clients.
Things can of course change. In order to protect yourself from binary options scams I would suggest sticking with what can be termed trusted more established brokers. These are the ones who have been in the game since the start and are generally well respected, well managed and well funded businesses.
You can check out our reviews for brokers that we feel confident with trading with here.