News

Nadex Tightens Rules on Customer Orders

February 1, 2017

North American Derivatives Exchange, Inc.—better known as Nadex—has introduced changes to its rules regarding customer orders in a filing to the Commodity Futures Trading Commission. The company, which operates one of two authorized binary options exchanges in the United States, has been seeking ways to provide more transparency to avoid any potential conflicts of interest when it comes to processing customers’ orders and receiving earnings.

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The new proposed rule changes involve what the company has termed “abusive trading practices”, which includes improper cross trading, trading against customers, and other practices which binary options have been tied to in the past. The move is a welcome addition in an industry that has been repeatedly blasted in the past year for its lack of transparency and the actions of some unregulated brokers in Europe that have been accused of being fraudulent and predatory.

Preventing Conflicts of Interest

Derivatives and binary options exchange Nadex has taken further steps to improve its transparency and remove the possibility of conflicts of interest from its trading system. The company, which is one of the few regulated ways to legally trade binary options in the US, took these steps in order to curb any potentially abusive behaviors by those carrying out trades on behalf of customers.

The new regulations, which have already been approved by Nadex and submitted to the CFTC, include changes to several of Nadex’s Rules, and especially those dealing with abuse. The changes were made to fall closer in line with existing CFTC regulations that forbid members and market participants from several abusive trading practices including trading ahead of orders, trading against customers’ orders, accommodation trading, and other forms of cross trading. These include practices such as money passes, wash trading, and front-running.

The changes made by Nadex to its rules include removing a clause that stipulates that “knowingly” engaging in these practices is illegal. Instead, the new amendment makes it so that any violation of these clauses will result in penalties. These rules apply to its Futures Commission Merchant partners, as well as any of its employees. This small change will make it a penalty to move ahead on any trade that runs counter to customers’ interests, and acts against their positions.

The other change to Nadex’s rules is the addition of front-running—the practice of placing personal orders ahead of customers’—to its prohibited actions list. This is also designed to avoid any potential conflicts of interest between brokers and their customers, as well as to encourage transparency

Clamping Down Further

This marks yet another step Nadex has taken to protect its customers. The exchange is known for its transparency and its efforts to provide a highly regulated and open system. It also falls in line with a broader trend of the industry in the US. Binary options are already heavily restricted in the country, as they are only tradeable via an exchange. This is a massive difference from the European model, in which clients work with brokers who then make trades for them, essentially pitting customers against brokers.

While there has been a push in Europe to move to an exchange-based model, brokers have been resistant to change a business model that has been profitable for them. Regardless, they may be left without options in the near future as regulators across the continent push for stricter restrictions and a more client-friendly approach. In the US, the exchange-only system means that customers can trade with the full certainty that any broker that works for them cannot act against their interests, as the system is more transparent.