Since they emerged on the trading scene back in 2008, over-the-counter Binary Options in the form offered by well known brands such as 24Options and Banc De Binary have received a lot of attention. It wasn’t quick until the negative press regarding these off exchange Binary Options providers began to mount up, with a number of rogue operators taking advantage of customers who had signed up to trade. Binary Options also received a significant amount of criticism as a product with many stating that these so called Options were no more than fixed odd financial bets in disguise. This criticism has been widespread with articles in major publications comparing Binary Options to gambling.
Binary Options: Gambling?
Unlike with other forms of financial trading, Binary Option brokers can only turn a profit if the majority of those betting on a particular market lose. Binary Option brokers price the Options using a formula which monitors the amount of money placed on a particular market and calculates odds which should see the brokerage turn a profit regardless of the outcome. This model is very similar to the one used by traditional bookmakers when they take bets on sports. When taking bets on a football game a bookmaker, will initially price the market in way in which they profit regardless of the outcome of the game. If a lot of money is placed on one particular outcome the bookmaker adjusts the odds to partially cover their risk. The business model used by Binary Option brokers is remarkably similar to the one used by traditional bookmakers and it is no surprise that Binary Options are often considered a form of gambling.
Another reason why Binary Options are often considered a form of gambling is that the company offering these options, always prices the options in a way which gives them a distinct advantage. Binary Option providers tend to offer returns of around 75%, which gives them a significant edge over their customers. This means that customers have to correctly guess which way the market is going to move around 65% of the time in order to just break even. While I’m sure that there are some people that can overcome this significant disadvantage, the majority of people who try their at hand at Binary Options are going to come out losers.
One other reason is commonly cited to why Binary Options should be considered a form of gambling. The majority of Binary brokers primarily offer very short term Options, with many trades lasting no more than a minute. Some have said that this makes even more difficult for those trading Binary Options as it can be extremely difficult to predict such short term price movements, this combined with the fact that the Binary Option broker having such a significant edge means it’s unlikely for those trading Binaries to ever turn a profit.
Binary Options: Trading?
Some insist that Binary Options can be differentiated from gambling and should be considered a form of financial trading. For one it is the opinion of the European Commission that Binary Options are in-fact a financial instrument as defined in the Markets in Financial Instruments Directive. Despite the opinion the European commission, only two European countries have classified Binary Options as being a financial instrument. It is true that the decision by Cyprus and Malta to regulate the Binary industry did give the product more legitimacy in the eyes of many.
Some also believe that Binary Options should not be considered a form of gambling, as it is possible for skilled Binary traders to beat brokers despite the latter’s significant statistical advantage. It certainly seems that some have been able to profit from Binary Options, but industry statistics suggests that average customer loses around $1,200 before giving up Binary trading. Which strongly suggests that the average Binary trader comes out a significant loser, which isn’t surprising considering the advantage which brokers posses.
Binary Option brokers operate in a way similar to bookmakers, making profit only when the majority of their customers lose money. This combined with the fact that Binary Option providers have a significant edge over their customers has led many to compare Binary trading with gambling. Despite this some insist that Binary Options are not a form of gambling, but are instead a legitimate form of financial trading, however these arguments aren’t particular convincing. It does certainly seem that Binary Options are comparable to gambling in a significant number of ways and it is for this reason they have received a lot of criticism as trading instrument.