US Binary Options Regulations

Over the past several years, the online financial trading industry has seen a massive growth in the number of traders participating in binary options trading. Binary options were first introduced in 2008 when the U.S. Securities and Exchange Commission (SEC) approved their listing on the U.S exchanges such as the American Stock Exchange (AMEX) and the Chicago Board Options Exchange (CBOE). While it may be the U.S. financial industry that created retail binary options as a new form of financial investment, it was across the Atlantic in Europe that binary options truly gained widespread popularity.

In general, the U.S. binary options industry though growing, has not been growing as fast as its European counterpart. There are several reasons for this more limited growth.

Hurdles to Regulatory Approval

First and foremost is the question of regulation. The U.S. financial markets have always been known throughout the world as one of the most tightly regulated markets in the world. In order for any broker to obtain a license from the regulatory bodies, the broker must first be able to meet the capital requirement. Typically, the broker must be able to show that it can maintain an adjusted net capital (ANC) of at least USD$20 million and fulfill other financial commitments in relation to liabilities. In comparison, the European regulators such as the Cyprus Securities Exchange Commission (CySEC) and the Malta Financial Services Authority (MFSA) only require brokers to come up with EUR 100,000 in terms of regulatory capital. Given the vast difference in regulatory capital requirements between the U.S. and the European markets, it doesn’t take a rocket scientist to figure out why most binary options brokers have opted to set up their operations in Europe. This however, means they cannot service US traders.

Exchange Broker vs. Off Exchange Broker

In addition to the tough financial regulatory requirements imposed by the U.S. regulatory authorities, the type of binary options traded in the US differs from those traded outside of the U.S. market. In the U.S., binary options are exchange traded. This means the buying and selling of binary options are actually conducted between the traders themselves. The broker’s only role in this case is to act as an intermediary to facilitate the transaction between the buyer and seller. In contrast, binary options outside the U.S. are traded on an off exchange basis. This means traders are essentially betting against the broker rather than each other.

The implication of this for a broker wanting to establish an operation in the U.S. market is the fact that the broker must have a sufficiently large enough traders’ base to start with. Alternatively, if the broker doesn’t have a large enough traders’ base, then it must have sufficient capital to sustain itself until the number of traders has reached critical mass. Again we can see clearly why many brokers have opted to set up shop outside of the U.S. market.

NADEX

At present, the only legal binary options broker in the U.S. is the Northern American Derivatives Exchange or NADEX owned by the UK based IG Group. Despite the fact NADEX has a virtual monopoly of the U.S. binary options market, the choices of binary options contract types offered by NADEX pale in comparison to what other leading binary options brokers are offering in the European market.

It is this lack of choice which has prompted many U.S. based traders to look outside the U.S. for alternatives to what NADEX has to offer. And to cater to the lucrative U.S. market, many leading binary options brokers in Europe have actively courted U.S. based traders to sign up with them.

Clampdown on Offshore Brokers

For several years, binary options brokers outside of the U.S. have accepted U.S. based clients thinking that the U.S. regulatory requirements do not apply to them since they are based offshore. However the situation changed in mid 2013 when the U.S. Commodity Futures Trading Commission (CFTC) and SEC decided to charge Banc De Binary (BDB) for offences under the “RICO” statute. Today as a result of the BDB case, most binary options brokers outside the U.S. no longer accept traders from the U.S.

Conclusion

Although the U.S. market is a tough market to penetrate due to the stringent regulatory requirements, many leading players and experts in the binary options industry still see the U.S. as the land of opportunity. In fact, many binary options trading platform providers such as Tradologic and SpotOption are developing platforms which can accept exchange based binary options.

To date, only SpotOption has come out with a trading platform that is geared towards on-exchange binary options trading. In fact the platform has recently made its debut in the U.S. market under the white label brand Forest Park BX owned by Ambassador Capital Management LLC, a company registered with the CFTC as an independent introducing broker (IB). Considering the fact how successful SpotOption’s white label business model has been to date in the binary options industry, we might just be able to see the U.S. binary options start to grow just as fast as its European counterpart.