Regulation

The Evolution of Binary Options Regulation

Regulation is one of the most widely discussed issues amongst binary options traders, and often plays a key role in selecting a broker. For those new to the markets, it is used as a yardstick, a way to sort the wheat from the chaff when picking professionals to work with.

Despite confusion surrounding this, it is important to point out at the start that regulation is an advantage, not a necessity. Like the forex industry before it, the binary options trade will take some time to become fully regulated, yet it has certainly made significant advances in recent years.

Indeed, today one could arguably state that most brokers have sought or are seeking a licence from one of the main regulators, such as the Cyprus Securities and Exchange Commission (CySEC), and the British Financial Conduct Authority (FCA). In doing so, they are taking an important step towards increasing investor confidence in them.

On this note, it’s a good idea to begin this article by exploring why regulation matters…

Why Binary Options Regulation is Important

Let’s start with the basics: defining what regulation isn’t. It is not, as is often believed, a measure of legality or otherwise. So, why bother with it at all? The answer is twofold.

Firstly, markets are better able to function with a clear set of rules and regulations. Created by experts, these may not be legally binding, but they are essential to ensure physical rights, underpin transactions, and safeguard fair competition.

Secondly, they offer protection, for companies and their clients alike. The rules guarantee the safety of those involved, and help to mitigate broader market failures in the most competitive industries. On the part of the consumer, they shield them from abuse, scams, and fraudulent activity.

The History of Binary Options Regulation

Despite the importance of regulation, it has not always existed. Options trading in a broad sense has been around since 1971, when the Chicago Board of Trade formed the Chicago Board Options Exchange. In the earliest days, it was an investment vehicle utilised by only the most elite investors, and was thus minimally regulated.

As the decades passed, this began to change. Regulation improved, and the quality of options transactions increased. A body known as the Options Clearing Corporation (OCC) was formed, and this helped to ensure that the assets that investors bought and sold were as claimed. In cases of serious malpractice, this organisation even had the power to implement bans.

In time, binary options became more user-friendly, yet they remained the product of an exclusive market, where transactions were still conducted over-the-counter. Regulation did exist by this point, but was minimal.

2007 marked the beginning of a real change in attitude. At this time, the OCC made the decision to enable binary options to trade on the major stock exchanges. This was legalised by the U.S. Securities and Exchange Commission in 2008.

Binary options growth

As a result, the number of binary options brokers boomed, and an increased number of investors began to trade them. This trend was only reinforced in 2010, when the odds, risks, and fixed rewards of these instruments was revised to make them more appealing. Now, they are the fastest growing and most popular segment within the entire investment industry.

Regulation has increased in line with this, and today CySEC is the main regulator of binary options. A number of other bodies also exist around the globe, each of them dedicated to creating a safer trading environment for all.

The specific rules imposed by various bodies varies from country to country, with each nation having its own laws and restrictions. Brokers must be regulated by their national authority, and because the majority are located in Cyprus, CySEC is at the forefront of this movement.

Regulators

As it stands, the key regulatory bodies include:

• CySEC

  CySEC is the body that the majority of brokers are regulated by, because it’s cheap and tends not to impose overly restrictive conditions. Although it has been accused of being too easy on brokers, there are examples of both warnings and fines having been issued where misconduct or misbehaviour has occurred. There are those who feel that they should be more decisive in taking action, yet where a broker has CySEC regulation, we’d argue that you can still have confidence in using them.

• FCA – Financial Conduct Authority

  The English-based regulatory body is known as the FCA, and is famed for imposing strict conditions on brokers. Professionals regulated by them, such as ETX Capital, are thus a safe choice, and will have had to work hard to prove themselves worthy of their licence. Should those using an FCA regulated firm find themselves unhappy with the way a complaint is handled, they also have the British Financial Ombudsman Service to fall back on.

• Financial Industry Regulatory Authority (FINRA)

  FINRA are a U.S. based regulatory body, which investigate the activity of brokers through their complaints programme. They have a significant amount of power when it comes to addressing abuses, ranging from the imposition of fines to suspensions.

Other American watchdogs include: the Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission (CFTC) – who regulate Nadex and the CBOE, and the National Futures Association.

These are only three of the multiple bodies around the world, which shows just how far binary options trading has progressed in its quest to become better regulated. Although it is not an infallible measure of trustworthiness, choosing a regulated broker should always be the preferred option, conferring greater safety, greater reliability, and greater protection. Full regulation around the world remains a goal for the future, yet considering the steps already taken, it seems an eminently possible ambition.