Please Note: This article is out of date and the legal situation in USA may have changed. We hope to revisit and update this article shortly with more current information.
Since binary options first became available in the US in 2006, traders have shown a considerable amount of interest for this relatively new form of investment. The binary options industry experienced a boom in the later part of 2008, as traders from every corner of the country wanted to learn and participate in this type of trade.
As a result of the financial crisis experienced by the United States in 2008, the financial securities market has greatly evolved over the years, and some critics would say it has become very restrictive, especially in terms of binary options. Despite this, the US is one of the few countries in the world to have a very solid regulation structure in place, which assures the utmost protection for traders by adding many security layers. Some view this as limiting, but most investors feel confident in investing in binary options due to how closely monitored the market is. If you are interested in trading binary options, this article will provide you with every detail you need to know before getting started.
The legality question of binary options in the US has two layers. The first consists in whether binary options brokers from the US can operate in accordance with the federal and state laws; the answer is yes. The second layer involves traders and whether they can lawfully start trading options; the answer is yes to this as well.
The US history of binary options shows that over the counter transactions were popular at first when there were very few regulations in place. In 1973, the Chicago Board Options Exchange (CBOE) was created and provided a trading platform. A few years later, the Options Clearing Corporation (OCC) started regulating all over the counter operations in order to keep a closer eye on buying and selling activities. Anyone who would stray for the rules would be banned from trading options, either temporarily or permanently, depending on the severity of the breach.
Regulation of the US binary options industry came in 2007 when the OCC proposed a ruling that would formally legalize and recognize binary options on the major markets. In 2008, the Securities and Exchange Commission (SEC) approved binary options and listed them as cash-or-nothing security. After the SEC started listing them, the American Stock Exchange (Amex) and the CBOE followed suit. Not long after came the North American Derivatives Exchange (NADEX), which decided to include binary options on one of its trading platforms.
At this time, the financial trading market in the United States is regulated by the Commodity Futures Trading Commission (CFTC), along with the SEC. Both organizations are tasked with the supervision of the US financial markets, which includes binary options.
The regulation of binary options in the US have become more stringent over the years, in an effort to protect consumers and ward off any potentially illegal offshore brokers from conducting business with US investors. There are strict trading rules in place, which the CFTC and the SEC expects both traders and brokers to respect. The goal in restricting the financial markets is to enhance its strength and reliability, for traders and companies alike.
The laws in the United States pertaining to binary options are often described as restrictive and very unfriendly towards foreign traders. The financial securities industry is tightly protected in the US and as such, no national regulator has yet awarded a binary options license to an offshore broker. This applies even if an offshore broker meets the stringent criteria of the US regulators.
With such limiting laws, regulation authorities have only offered licenses to a select few US companies. By law, obtaining a binary options license means that a company must respect and ensure traders’ safety and security. Digressing from the regulations can lead to costly fines, loss of license, and even prison sentences for the more serious offenses.
The CFTC dates back to the 1920s, as part of the Department of Agriculture, but it was in 1974 that it became an independent agency. Interestingly, the CFTC used to be in charge of the Commodity Exchange Act (CEA), which back in the 1860s, regulated agriculture commodities (e.g. corn, cotton, and wheat). The CFTC’s mandate is to protect consumers of financial products from any type of malpractice, whether that is fraud, manipulation, abuse, and other systemic risks. In doing so, it promotes transparency, openness, and healthy competition for all financial markets. Market integrity is at the heart of the CFTC’s role, which is why it oversees various organizations within a number of fields such as designated contract markets, derivatives clearing organizations, swap data repositories, futures commission merchants, swap execution facilities, and more.
As the US struggled to maintain financial integrity amid the 2008 financial crisis, President Barack Obama requested that the CFTF reform the market, especially the unregulated swaps market, which have been partially to blame for the recession. The Commission now oversees over $400 trillion in swaps market, which are much bigger than the futures market.
Confidence, both on the part of consumers and companies is a crucial component to any well-functioning financial market. The CFTC strives to maintain a high level of confidence throughout the various markets, which is why it has decided to implement very strict rules about trading binary options.
The SEC came at a time when the financial sector in the US was in dire need of reform. Prior to 1929, there were practically no federal regulations in place for the financial markets. However, this all changed when the stock market crash occurred in October 1929; many investors and banks lost large sums of money, and in order to come back from the Great Depression, the public’s faith in securities markets had to be re-established. After consultation, Congress agreed on the Securities Act of 1933 and the Securities Exchange Act in 1934. The SEC ensued; at the time, it was mandated to restore the consumers’ confidence in capital markets by the provision of credible information and establishment of clear rules.
Today, the US SEC works in conjunction with the CFTC and together they strive to protect investors and maintain honest and orderly markets that promote wealth and healthy competition. The SEC regulates the securities world, which includes exchanges, brokers and dealers, investment advisors, as well as mutual funds.
The SEC also strongly believes that thriving capital markets rely on investors’ education and critical analysis, which is why it provides a website complete with detailed educational information to aid investors in making informed decisions about financial investments.
Aside from the CFTC, the SEC also works closely with Congress, other federal sectors and agencies, stock exchanges, state securities regulators, and other private sector firms. Investors recognize the importance of the SEC and appreciate that it generally holds meetings where the public is welcome to attend and participate in the discussions to better the financial markets.
Investors from the United States have two options when it comes to choosing a binary options broker. The first option consists in registering with an offshore broker. Although this is highly discouraged by the US regulation authorities, individuals still have the ability to go online and register with a broker of their choice. Traders should know that the CFTC along with the SEC prohibit offshore brokers from soliciting residents of the United States for trading purposes. Traders sign up at their own risks and should be aware that no foreign broker can obtain a license from US regulatory agencies. If you find one that says otherwise, they are likely fraudulent. Instead, traders should look for brokers registered with other regulatory bodies such as CySEC or the FCA and PRA in the UK.
The second option, which provides solid layers of protection for traders, is to register with a US broker. While traders may find this option more limiting, it is considered the safest method for trading binary options within the country. In the US, traders must trade with an exchange-backed operator such as NADEX and AMEX.
Best practices for trading binary options
Addressing binary options within the context of the United States necessitates a discussion around the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became federal law in 2010 in response to the recession. This Act brought significant changes to the regulation of capital markets within the US and greatly affected the binary options sector. Traders have expressed mixed feelings about the Act; its goal is to offer higher levels of protection but in doing so, it appears that the binary options market has greatly suffered. Binary options traders can no longer use stocks and currencies as underlying assets for binary options. However, commodities and indices are still permitted.
Whether you choose to trade within the US or you decide to sign up with a foreign broker, you should keep in mind a few best practices for a positive experience:
Any legitimate binary options broker will have a license from a regulatory body. This information should be readily available to you and it should be easy to verify its validity with the appropriate authorities.
2. High quality platform
Since your trade activity will happen on a trading platform, take advantage of the demo account opportunity to scout any potential pitfalls you would want to avoid. A platform should be user-friendly and provide accurate information about the markets.
3. Payouts and bonuses
Look for brokers that offer high payouts with low withdrawal fees. Many brokers also offer attractive bonuses. Read the fine print and do not hesitate to ask questions to make sure you fully understand the risks and benefits in choosing a certain bonus.
4. Educational tools
As a binary options trader, you will want to learn about assets, strategies, and financial markets on a regular basis. If you intend to increase your profits over time, having access to excellent educational tools can help you set yourself apart from other traders. Many brokers offer tutorials, market reviews, charts, market analysis, and forums where you can learn and chat with others who share your passion.
As stated above, the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 changed the face of binary options in the US. This new way of standardizing binary options means that they have to be exchange-traded.
For traders choosing to sign up with an offshore broker, the assets repertoire will typically be wide open. Most reputable brokers offer all of the major assets. Within the US, traders have a more limited choice. As such, Amex offers options on a few ETFs and some liquid equities like Citigroup and Google. Amex also uses a slightly different language structure: binary options are “Fixed Return Options”, calls are “Finish High”, and puts are “Finish Low”.
As for the CBOE, it offers options on S&P 500 and the CBOE Volatility Index. Investors looking to trade options on the CBOE only have access to call options. All options have values in between zero and one dollar, with a multiplier of 100, and tick size of $0.01. All are also cash settled.
Finally, since 2009 NADEX has been providing binary options on certain forex, commodities, and stock indices markets.
Future of binary options
Financial experts agree that although the US binary options market is rigorously monitored and very safe, it is also making it extremely difficult for legitimate and high quality brokers to crack the market. Since binary options have to be traded on exchange, the costs and implications required to ensure compliance from foreign firms would be exorbitant, which is why the regulatory agencies have so far refused to consider this a possibility.
It is believed that the strict regulations currently in place will be expanded on and that the US is very unlikely to ever open the market to off-exchange binary options. While it offers great protection, it also means that the financial betting market will likely be dominated by a few major players. This will result in less competition and lesser need for service improvement and betterment of the industry.
The binary options market in the US is unique in that no other country currently has the same structure and rigidity in regulations. As the sector continues to grow in popularity, it will be interesting to see which direction the CFTC and the SEC will move into and its impact on the future of binary options in the US.