This Is How Binary Brokers Get You
With the recent horrifying story about a suicide of a family man who lost his entire life savings in binary options, it is important to understand how this industry works and how some binary options brokers operate.
Before we dive into discussing the advertising gimmicks, one of the most important aspects to understand about trading binary options as opposed to Forex is that you essentially trade against your own broker.
Where does my money go when I place a trade?
The money that you place on trades is not really invested into the financial markets and does not in any way influence the price action of traded assets.
The money that you invest in a trade is essentially a bet taken by your broker against other traders and the system. Essentially your binary broker is ‘the house’ and just like in a casino you play against the house and other players.
The only difference is that it is based on trading and the main reference is the markets and the price action of commodities, currencies, stocks, and indices. This is also one of the main attractions to binary options trading and something that gives great validity to the whole experience.
Who makes money when I lose?
When you lose your broker makes money and when you win your broker pays your winnings from the pool of money it gets from losing traders.
If your natural curiosity asks what happens in a situation when more people win than lose, the answer to that is simple. This never happens because in binary options, as well as in Forex, there are a lot more losers than winners. The main reason for this imbalance is the lack of trading knowledge and experienced of new traders.
However, if such an unnatural imbalance should ever take place, binary brokers can use additional measures in their online platform to make sure the balance and their functionality is fully protected.
Binary options is a very lucrative business
All binary option brokers operate online, they don’t build any brick & mortar trading centers where users could go physically and trade. In that respect it is considerably cheaper to operate binary broker business.
Platform Technology can be leased from specialist companies. They can also redesign their platforms to suit specific needs. Most new broker need to focus on finding new clients and keeping them trading.
Trading binary options is very popular and there are enough gamblers out there who will do just that, gamble. The allure of getting 80% return on a ‘quick’ investment bet is beyond the self-control of many people.
Most of the big binary option brokers notice a year-on-year increase in their profits. Unfortunately their exact earnings are kept confidential but judging by the minimum trading amounts often set by brokers, which is usually $25, it’s quite safe to assume that with good exposure their earnings will go very high.
The legion of sales agents and affiliates
All binary option brokers have a very strong sales force, incentivized with handsome bonuses, but they also offer high commissions to affiliates who promote their products online.
Binary brokers often sponsor affiliate conferences where they provide additional information about their services, new marketing tools and advertising methods.
Affiliate marketing is nothing new and it is used by many companies worldwide but not many of them offer such high commissions as binary option brokers.
The issue with very high commission rates becomes more apparent when people start promoting binary options and recommending it to their friends without a good understanding of how they work.
Practically anyone of legal age can become a binary options affiliate. To promote their affiliated broker people use social media accounts, websites, advertising banners, emails and even word of mouth, focusing only on their commissions and usually only mentioning the good parts of binary options. The parts were people win big and do it quickly.
As you can imagine this makes a lot of ordinary people jump to the opportunity and sign up to the recommended broker online. What follows, is the same old story, 95% people lose their money. (Unless they seek professional help)
When broker competitiveness turns ugly
Since binary options is a very lucrative business it has also become extremely competitive in recent years. As we all know when competition is healthy and respectful of one another the end customer wins. But when competition turns ugly and false promises are made to vulnerable people, the industry loses trust as a whole.
This is exactly what is happening right now as more regulators step in to close brokers that mislead their customers.
One of the most recent ‘shocking’ closures of a big and widely recognized binary broker, Banc de Binary, showed us that there is no such thing as too big too fail in the world of binary options.
People who had money invested with this particular broker were advised to close existing positions and withdraw whatever was left of their money.
It should be mentioned that Banc De Binary was not a regulated broker.
The most fundamental rule of binary options
The most significant rule in binary options is that the odds are against the trader. What that means is that the more you play the more you are likely to lose. It’s simple mathematics.
In order to break even in binary options you need to win about 56% of the time.
To understand why and see real life examples please read Is it possible to make money in binary options?
Just keep them trading
Obviously with odds against the trader the main thing is to keep people trading. Binary brokers will go to great lengths to keep their clients.
They hire top sales people and set up or hire specialist call centers. Sometimes in countries where the regulation of such activities is much more relaxed.
Going back to the unfortunate story of man who committed suicide it was later revealed during the course of the investigation that the sales representative was still pushing the client through private messaging service to make large deposits despite the fact that he knew about the big losses he incurred and that he was gambling with all his family’s life savings. Here is the headline from The Times of Israel who first published this story:
The call center was based in Israel, a notorious place for aggressive sales force of binary brokers. This time the representative went too far and life was lost due to malpractice.
This is what happens when the payouts for employees are based on results and where bonuses drive the sales, instead of regulation and supervision.
Of course, not all binary brokers are like this, some of them actually try to respect the client enough to let go.
Your dream life is within in your reach
The sales people, or as they like to be called ‘your account managers’ can get into your head very quickly. They are trained to do so.
They ask about your family, your ambitions, your goals. They try to relate what you tell them with their own situation and they are more than willing to share things about their own life with you. They may come as a friend, but make no mistake about it, their goal is to keep your depositing and trading.
Some account managers will go as far as to call upon God and religion to make things work for you. They will build a vision in your head where things become possible thanks to the money you’re going to win.
They will often say that wining is completely within your reach and they may assure you that they will guide you every step of the way. They will inform you of fantastic trading opportunities that can turn your luck around very quickly.
Of course what they neglect to tell you is that there is actually a higher probability that you will lose your invested amount and that dream that was built on the theoretical winnings will be even farther away.
Again, it should be mentioned that not all brokers act this way. However, many of them do and you may come across them when you trade binary options.
Bringing in new clients and their deposits
In addition to keeping their existing clients trading, a huge priority for binary options brokers is to get new traders on-board, the less experienced and more ignorant the better.
Most brokers dread the presence of professional traders who know how to win consistently because they lose money on them.
Since most brokers prefer inexperienced traders the main focus of their advertising is anyone over the legal age, preferably with a job or a savings account and a burning desire to get rich quickly and live their dream.
That is a huge demographic, and since it is so cheap and childishly easy to sign up and start trading binary options based on the world’s financial markets, it also has a very wide appeal.
Sell them money, rush, and power
Due to the fact that all binary options brokers operate online, the easiest and quickest method to reach potential clients is by online advertising. Banners, pop ups, emails, sales websites, social media, etc., all these methods can be used by brokers, as well as their affiliates.
The 100% deposit bonus
We have all been exposed to binary broker ads one time or another. Perhaps you’ve noticed it or perhaps you did not but binary options brokers will offer handsome bonuses just for signing up.
100% bonus on first deposit is not uncommon, however what is common is the terms of each such bonus offer which clearly limits your withdrawals until you make and X amount of trades. This forces new users to remain on their platform and keep trading.
Captivating broker ads
Binary option brokers use ads that appeal to our primal instincts, mostly the desire to take risks and achieve more power, which today it’s strongly associated with money.
Many binary brokers will hire known sports personalities for their ad campaign to insinuate precision, perfection, and success. As binary options trading becomes more mainstream brokers often look to sponsor athletes and events.
So how do you stay protected?
Since you, as the client, trade against your own broker, it’s advisable to only trade with regulated brokers since their operations are under a regulatory body that checks on them periodically.
The most important thing to observe is that the broker is regulated in the region you reside, otherwise it will be out of their jurisdiction. If you live in the EU you can use a regulated broker within any EU country, so regulated brokers based in Cyprus or London will be fine. However a regulated broker based in Israel will not.
Another way to protect yourself from losing is to use professional trading signals and only trade when you receive a signal. Trading on a ‘gut feeling’ will drain your account very quickly and if you don’t have trading experience and a trading plan that is specifically designed to trade binary options you will be well advised to use signals from professional traders or not to trade at all.
The best way to protect yourself from falling a victim and losing your money is to educate yourself about binary options and trading and not to pay any attention to marketing gimmicks and sales agents.Published in Education