Regulated vs Unregulated Binary Option Brokers

With the binary options market expanding rapidly and new brokers constantly joining its ranks, choosing a good broker can be a tough call especially for a first-time trader. Although experienced traders will for the most part deal with regulated brokers, there are many options traders who rely on unregulated brokers. A regulated broker is required to act within the rules set by the financial regulatory body that has registered it. This regulatory body has the mandate to supervise the activities of the broker. An unregulated broker, on the other hand, conducts its business independent of any regulatory body.

It's important for the trader to understand the pros and cons of working with each type of broker.

Trading with a regulated broker

Trading with a regulated broker offers you the best protection from possible legal oversight that comes with binary options regulations. The broker is required to follow the rules by the regulatory body and therefore conducts its operations in a highly transparent manner. This is an important consideration especially now that incidences of binary options scams and fraud are on the rise.

A regulated broker will not manipulate the markets, and will honor withdrawal requests by the trader. This guards the trader against unfair trade practices by some brokers who act as market makers and take the other side of the trade thereby failing to act in the best interest of the trader.

With a regulated broker, your investment is secure. Many regulatory bodies require the broker to pay consumer compensation funds to traders in case the business goes under. This guarantees the trader that he will recover at least part of his investment if things go awry. Further, regulated binary options brokers operating in the U.S. are now required by law to have a minimum of $20 million in capitalization. This minimizes chances of the broker losing client's funds if the business goes bankrupt.

Trading with an unregulated broker

Most brokers operating in the market today are not regulated. At first glance this might seem counterintuitive to a trader due to all the associated risks. But there are some surprising benefits that come with an unregulated broker compared to regulated brokers. Perhaps the most important of them is that an unregulated broker can trade for you in virtually any country of your choice. For instance, many brokers operating in Europe are regulated by Cyprus-based CySEC. Unfortunately CySEC prohibits its members from accepting U.S. traders. This effectively cuts the trader from accessing some markets.

Another big advantage that unregulated brokers have over their regulated counterparts is that they typically have lower operating costs which translate to fatter margins and profits. For instance, an unregulated broker does not have to pay for regulation or license fees. Some unregulated brokers are able to pass on these cost savings to their clients in the form of higher returns for the trader.

The biggest downside of trading with an unregulated broker is that some brokers have been known to manipulate the markets and even trading software in a bid to lower the odds of the trader making winning trades. Some brokers also employ a number of unfair trade practices, including making the process of withdraw of trader funds onerous while some use crafty traps such as bonuses to block the trader from withdrawing funds.

Although traders in the U.S. can trade with either regulated or unregulated brokers, the law prohibits unregulated brokers from offering their services pro-actively to traders. This can potentially limit the ability of the trader to discover them.

Look at the broker's capitalization

It's just as important to check the market capitalization of the broker as it is to check whether the broker is regulated or not. This minimizes the risk of the trader losing all funds if the broker goes bankrupt, and is even more critical for traders who place big trades. Previously, brokerages would start operations with as little as $100,000. This resulted in many of them failing to honor their obligations to their clients. The NFA (National Futures Association) and the CFTC (Commodity Futures Trading Commission), however, recently tightened regulations on binary options trading by requiring brokerages to have a minimum of $20 million in capitalization in order for them to operate in the country. To check whether a brokerage is sufficiently capitalized, you can check the CFTC website. The CFTC has a list that displays the capitalization of all its members. This list is updated on a monthly basis. Many brokerages which are unable to meet this requirement are frequently forced to relocate to Europe where requirements are less stringent.

Luckily, many brokers have gone a step further to guard against losing too much money in the case of large winning trades and in the process risk failing to honor their clients' obligations. Many brokers now hedge their risks or underwrite them with third parties. This allows them to comfortably make payouts to traders even for huge winning trades.