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History of binary options - how it all started

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Lesson 1

The journey of binary options trading is fascinating and has its fair share of ups and downs. The binary industry evolved, interestingly, in the United States and quickly spawned across the globe.

Binary options have become very popular, mostly because of the low minimum deposits and fixed payouts up to 100%.

With its simple beginnings in 2008, the binary options industry has witnessed sharp growth in its popularity in the retail trading sector. While there are no official statistics on the industry, according to some private estimates and industry insiders, the binary industry is known to be valued at $2.5 billion U.S. dollars (in 2016).

Of course, binary options are by no means as big as forex trading, which has a turnover in the trillions of dollars daily. Nonetheless, the estimated valuation in just under eight years is a feat. With such impressive numbers in its kitty, it is of interest to review the history of binaries and track how this industry evolved.

2008: SEC approved binary options

According to Wikipedia, the binary options industry began in 2008. This was around the global financial crisis, and markets across the globe were still feeling the effects of the stock market crash that started with the sub-prime mortgage business in the United States.

As with most financial trading vehicles, the birth of binary trading follows a familiar path. Every time the U.S. stock markets and the global economy fell flat on its face, wiping out billions in valuation, a new financial instrument was born from the ashes.

Last time, it was the birth of the Exchange Traded Funds (ETF) industry in the aftermath of the 90's dotcom bubble; this time it was the birth of binary options.

The U.S. Securities and Exchange Commission (SEC) approved a regulated exchange traded binary options facility during the year and trading quickly commenced on the American Stock Exchange (AMEX) and the Chicago Board Options Exchange (CBOE).

The first binary options contracts were offered on stocks, and the term "Fixed Return Options" was born as a way to describe the nature of binary options trading.

2009: NADEX began operations

Following the success of the initial phase, in 2009, the North American Derivatives Exchange (NADEX) was established. The exchange, formerly known as HedgeStreet, started to specialize in binary options and spreads.

Binary options, which are after all derivatives or synthetic products, was of course the need of the hour. Following the stock market crash in 2008 and the sovereign bond crisis outside the United States, traders wanted to have a product they could use to hedge their risks.

The concept of binary options was perfect as it offered a synthetic product that could be traded. Traders who had exposure to the underlying markets could simply use options trading at practically half, if not more than, the initial cost of investment.

By using binary options, and options trading in general, investors could better hedge their risks.

The setting was perfect as NADEX started its operations online, making it easier for traders and investors to access options trading. The company was regulated by the U.S. Commodity Futures Trading Commission (CFTC).

In 2007, the UK-based IG Group acquired HedgeStreet for $6 million U.S. dollars. Later, NADEX began to offer binary options similar to those already available on the IG trading platform.

2010: Banc de Binary spreads the word

Following the success of NADEX, it was only a matter of time before similar institutions cropped up elsewhere. In 2010, a Cyprus/Israel-based company, Banc de Binary started to take the world of binary options by storm.

With just under $250, one could start trading options with the prospect of making 85%, if not more, in returns in a short span of time. Traders struggling to make money with forex trading found this to be an attractive alternative.

As with all good things that eventually come to an end, Banc de Binary's marketing strategies, which started to become a lot more aggressive, combined with reaching into markets that required regulation, caught the eye of financial watchdogs on both sides of the Atlantic.

After enjoying tremendous success since its launch in 2010, Banc de Binary was finally hit by funds both by the SEC and the CySEC. There were quite a few complaints made against Banc de Binary, and some customers claimed large losses.

The company had to eventually cease operations and closed business in early 2017. The various accusations included false and misleading advertising and rather aggressive marketing strategies and customer service.

Perhaps, the binary options market was aptly summarized by one employee who called it the “Wild West,” hinting at the way business started to be run.

2012: CySEC regulates binary companies

Around the same time as Banc de Binary began to enjoy its success as a leader in the industry, a number of binary brokers started to crop up. This was partly facilitated by a growth in the number of white label platform providers.

The ease one could set up one’s own binary business attracted people from all walks of life, some downright shady. With the ability to set up a financial product without being regulated, it was only a matter of time before some binary options firms began to defraud their customers.

This led to the Cyprus Securities Exchange Commission (CySEC) regulating binary brokers. It was the first EU regulator to treat binary options as a financial instrument. Since 2016, the industry has been tightened up by restrictions from CySEC in terms of online marketing practices and customers acquisition.

Combined efforts from various regional European regulators, such as Belgium, the Netherlands, and France, saw a massive clampdown on the binary options industry with lawmakers going after unregulated binary firms.

The attraction for binaries was partly due to the simplistic nature of the trade and the fact that one did not need to put up huge sums of money. Combine this advantageous prospect with no need for leverage and throw in the term “Fixed Risk” and binary options quickly became popular with traders.

Thanks to the combined efforts by financial regulators across the globe, the binary industry has managed to have a facelift, especially after unregulated brokers found it harder to compete against the regulated companies.

While the industry has peaked, growth is expected to continue as binary options and the derivatives markets are unlikely to go out of business any time soon. For the average retail trader, this only means a safer playground with many of the binary brokers now regulated.

The history of binary options shows that, as a trader, there is no telling whether the broker is legit. What that tells us is traders need to be cautious when it comes to choosing to trade with a company.