Regulation of Financial Markets
Trading of financial instruments have traditionally taken place in specific financial markets, such as a stock exchange where the buyer and seller are matched by a third party. There are types of transactions called OTC (over the counter) which take place directly between the buyer and the seller. Most OTC’s are regulated as well and are traded in major markets. Binary Options US regulations for example are handled by the SEC (Securities and Exchange Commission) which regulates the securities industry making sure that all exchanges and brokers adhere to US laws which regulate the markets. Most countries in the world have similar regulatory bodies to monitor their own security laws. Regulation is important for both the trader and the institution. The trader needs to have confidence that the market is fair and transparent. He also needs to know that his money is secure and that he can withdraw his funds in a timely and efficient manner. Institutions want to have the stamp of approval by the regulatory agencies so that they can secure customers who might otherwise be wary of investing with an institution that doesn’t have these guarantees.
Binary Options and Regulation
Binary Options are OTC transactions that take place directly between a buyer and a seller. They do not require a third party to facilitate the transaction. There is no actual purchase or sale of an underlying asset so trades do not take place in any specific financial market. The trades themselves are facilitated solely by computerized trading platforms, which can be hosted from anywhere in the world. For these reasons there has been no regulation of the Binary Option market. Still, there are countries which have regulated Binary Options. The SEC in the US regulates firms who offer Binary Options. The Nadex (North American Derivatives Exchange) offers a wide range of Binary Options which are actually exchange traded with continuous pricing for the options themselves. Most countries, however, do not regulate Binary Options. Companies wanting to start online trading platforms were drawn to countries that had lenient regulation as well as favorable taxation policies. Cyprus fit both of these criteria. Since it was part of the EU (European Union), once approved by Cyprus laws, these firms could operate in most European countries. Many brokers, therefore set up their companies in Cyprus.
The Need for Binary Option Regulation
As online Binary Option trading has gained in popularity so has suspicion of fraud and manipulation within the industry. Without proper regulation it becomes difficult for a customer to feel secure about trading with an online broker. The advent of regulation would boost confidence in the industry as a whole and increase sales for the brokers in the long run. In Cyprus, companies follow CySEC binary option regulation. CySEC (Cypress Securities and Exchange commission) institutes regulations for Binary Options. On May 4, 2012 CySEC came out with an announcement stipulating new Binary Option regulations, requiring all Cypress based Binary Option brokers to apply for a CIF (Commission for Cyprus Investment Firm) license. This will ultimately lead to the regulation of most, if not the entire industry as no firm will want to be unregulated, as it would be hard for them to acquire serious customers. SpotOption, with brands such as Banc De Binary and 24option, is the first platform to apply for and receive the CySEC license.