The binary option trading landscape is a rather intricate one currently, especially when it comes to regulation. You are probably aware that binary option trading, in the form in which it is exercised in Europe, is not really allowed in the US. All this has to do with regulation, as well as with the business models allowed by the law on the two sides of the Atlantic.
NADEX, or the North American Derivatives Exchange, is based on an entirely different business model than say 24option, which is CySEC regulated.
What makes NADEX special?
NADEX isn’t a binary option broker in the EU-sense of the expression. Rather, it is an exchange, which is fully compliant with the operating norms set forth by the Commodity Futures Trading Commission (CFTC), and as such, it offers US traders a fully regulated and legal way to get into binary options.
NADEX accepts traders from elsewhere too, but given that it’s one of only two US-licensed exchanges which offer binary options, its appeal in the US is obviously greater.
The differences between US and EU regulation
In order to understand why NADEX is special and what makes it perhaps the herald of a sustainable binary options business model, one needs to understand where US and EU regulation differ.
In the CySEC-accepted business model, the broker acts as the sole market maker. It has monopoly over the prices it features, which is why the prices offered on various assets by EU-based and/or licensed operators are often different from the actual market prices. That isn’t the main problem with this setup though. Being in this position also means that the broker is essentially trading against its traders, in a sort of house-vs-customer setup.
This carries a fundamental conflict of interest, one that US authorities aren’t willing to stomach. Indeed, from a purely objective standpoint, this conflict of interest does exist, which means that the CySEC-regulated binary option trading environment is far from being an entirely fair one for the retail trader.
In the US, only exchanges are allowed, which means that market making monopoly is forbidden. For this reason, operators like NADEX can’t really be called brokers either…they’re exchanges.
How does a pure exchange-based model work?
The other US-licensed exchange is one built on such a pure exchange-based business model. Such an operation lets every one of its participants – the retail traders – act as market-makers. This way, there is absolutely no conflict of interest involved, as traders go up against one-another, rather than against a “house”. In the pure exchange-based model, technology providers are free to come, set up shop and go if they feel their position isn’t profitable enough for whatever reason.
This way, through the use of white-label platforms, scores of exchange rooted trading brands can be set up. In theory, this is indeed the best business model, but in practice, such an approach is extremely difficult to drive through, because of the problems with liquidity. It is a chicken and egg dilemma: because they are the market makers, traders need to be drawn in to provide pricing on assets.
If there is no pricing, there is no trading, and if there is no trading, there are no traders to do the pricing.
How NADEX works
In order to combat the above described liquidity-issues, NADEX have adopted a sort of hybrid business model aimed at allowing them to provide pricing for a reasonable number of traded assets. They have two market makers, and they are this way able to overcome the pricing problems stemming from the initial lack of liquidity.
Some criticize this model as one contrary to the principles of free exchange, but it works and it has made NADEX by far the biggest and most attractive US-licensed option for binary trading. NADEX are in fact able to offer their customers a reasonable range of tradable assets, and thus they are able to keep liquidity up as well.
In the global scheme of binary option trading, NADEX have to compete with CySEC brokers too, not just US-regulated operators. They score their points in this respect by offering excellent payout rates, which are indeed higher than what most CySEC brokers offer. Also, they have features which make the trading of complex trading signals easier.
Such a feature is their NADEX 30 Strike Prices one, which is an excellent match for trading signals that effectively tell the trader where a certain asset-price will be in the future.
Those looking to trade such signals will definitely find NADEX more attractive than anything else out there. The added safety stemming from rigorous regulation is a mark in the plus column as well.
For those looking to trade in a fully regulated, legal way, with additional safeguards in place, NADEX is definitely an option. Its unique business model makes it viable in a highly regulated and very strict legal environment too.