How Do Binary Option Brokers Make Their Money?

There are two binary option business models currently powering the industry. The mostly CySEC-regulated single market-maker (European) business model, and the exchange-based (US) model.

If you are in Europe and you have a bit of binary option experience under your belt, you probably know all about what we’ll call the “CySEC” model. In this business model, the broker acts as the sole price-maker and it trades against its own clients. The setup is reminiscent of a casino, where the patrons play against the house. The same thing happens here, with traders going up against the house on every single trade that they take. The conflict of interest and the potential for fraud is quite obvious in this setup. The broker is essentially going up against the trader, on his own turf, according to a set of rules set and enforced by him. This is exactly the reason why US authorities haven’t allowed this type of trading to take root in the country and why EU authorities are increasingly frowning upon the setup too.

The “CySEC” model dangles a vast range of fraud possibilities for brokers, and some do indeed take advantage of such opportunities. They manipulate their prices, they induce slippage to cause trades to lose and they offer bonuses traders can never hope to earn out. Some of these practices are done by brokers who are otherwise regulated and licensed too.

The exchange-based business model, used by all US-licensed brokers, and some of their European counterparts too, is an inherently fairer one. In this sort of setup, traders act as the market-makers, which means that they establish pricing, according to the dynamic of supply and demand. The drawback is obviously that underlying assets which fail to draw enough interest will simply not have any pricing done. Through an exchange like NADEX and DAWEDA, traders trade against their peers and not against the “house”. What this means is that the exchange operator has no reasons to engage in unfair practices, thus skewing the trading equation one way or another. Whenever a trader wins a trade at an exchange, he takes home money lost by another trader. The exchange cuts a commission upon entry into a trade, as well as upon trade expiry, from the winner. This way, the exchange enjoys a steady stream of revenue, while the traders enjoy a level playing-field.

The most creative – and at the same time most disgusting – practices are those perpetrated by brokers situated in what can easily be called the “Wild West” area of the binary option trading industry. Such brokers are not licensed and regulated, and they answer to no authority in any shape or form. As such, they have a free hand to fleece the unfortunate traders who fall for their charades, any which way they see fit. Such scammers can indeed get very creative and they will stop at nothing.

One of their favorite tricks is to assign traders an “account manager” who then does the actual “trading” with the victim’s money, in the most “optimal” manner. Optimal in this case refers to the scamming of the trader unfortunately, which is why those who fall for such “offers” will inevitably always see their accounts emptied. The standard MO of these fake account managers is quite sinister. They first “win” a few trades for their clients, convincing them of their potential, and planting the seeds of greed in them. They then contact them directly and try to convince them to make additional deposits, promising fabulous profits. If traders draw the line and refuse to comply, the emptying of their accounts begins in earnest. If they try to make a deposit, various documents shall be asked of them and gradually, all communication shall be curtailed with them as the money disappears from their accounts.

Such brokers will also convince traders to request “generous” bonuses, which they will later be able to use to justify their refusal to honor withdrawals.

There have been cases when greedy victims of such textbook extortion schemes have taken out loans, using their homes as collateral. Things can degenerate extremely quickly in this regard, which is why would-be traders are always advised to steer well clear of unlicensed brokerages.