History of Binary Options

With shrinking opportunities for the average person to make high returns with limited capital investment, new forms of online trading have emerged. One of the most popular is Binary Options.  In reality Binary Option contracts have long been offered OTC (Over the Counter) and were considered “exotic instruments” in that there was no liquid market to trade the contract itself.

In 2007 the OCC (Options Clearing Corporation) proposed a rule change to allow binary options.  The SEC followed up in May 2008 with an approval to list cash-or-nothing binary options.  The AMEX, CBOE and Nadex all currently offer many types of Binary Options.

In mid 2008 websites offering online binary option trading platform began to operate. These are the Binary Option Brokers.  They offer a simplified version of the exchange traded binary options. The average investor is once again able to trade multiple types of financial instruments without investing large amounts of money and potentially gaining large daily returns.

Binary Options as Bucket Shops?

Some people would like to derisively claim that the origin of Binary Options dates back to the “Bucket Shops” which existed in the late 1800’s -early 1900’s.  The bucket shops allowed for people without a lot of money to trade stocks.  It also allowed for much quicker transactions as no actual shares of stock were traded.  Orders were placed with the shops based on the stock quotes listed on a board, as the price of the stock went up the house owed the customer money as it went down the customer owed the shop.  Transactions could be placed immediately as no calls had to be made to the trading floor for the actual purchase or sale of the stock. In practice the system was similar to electronic day trading, where trades are executed immediately by means of computer trading platforms.  Bucket shops became illegal in most states by the 1920’s.  Great pressure was placed by the stock exchanges to put the bucket shops out of business as they affected actual trading volume.  The truth is that bucket shops were not regulated and were subject to many fraudulent practices by the shop owners.  The tape was often times manipulated.  Shop owners would often times place actual trades to affect stock prices.  Trades were done on strict margin so if a stocked dipped below a traders margin he would lose all his money.  Since most stocks fluctuate throughout the day many traders would be priced out because of these fluctuations.

Binary Options as Day Trading?

In reality, these shops were considered by many to be the fore bearers to modern day day trading, where stock speculators would place bets on the price movement of particular stocks.  With the demise of bucket shops day trading did not reemerge in force until the late 90’s.  The advent of ecn’s, discount brokers, SOES and the dot.com boom in the stock market led to a boom in day trading.  By 2000  it was understood that most .com companies would run through their cash without ever showing a profit, the market crashed and most day traders lost their money.  Day trading has lingered for the last decade without ever coming close to its popularity from the late 90’s.  Originally lack of volatility and later a preponderance of programmed trading have have helped to choke off the success of even the most seasoned day trader.

In the article Why Trade Binary Options?, I explain how the high reward, quick time frame, low cost investment of a binary trade compares with traditional option or straight equity trades. In a follow up article I will compare and contrast the different types of binary trading platforms available in the market today.


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