A look at binary options history will show it to be quite an interesting one, as the market was actually borne out of circumstance. This is because even though awareness among the public is only just experiencing an increase, binary options history can be traced to the early 1970s when they were first traded in the Over-the-Counter (OTC) market in the US. At that time, these Over-the-Counter derivatives were available only to institutional traders and retail participation was virtually non-existent.
When markets all over the world took a massive hit as a result of the global financial crisis of 2008, there was generalized fear and a lack of investor confidence in existing markets. In order to spur retail investors to get back into market trading, the US Securities and Exchange Commission approved exchange-listed binary options trading for retail participation. The concept was to increase market activity using a simple financial product that most people could understand. The market has experienced a lot of evolution since 2008 and the state of the market is more robust than it was before. Though there have been some challenges along the way, the binary options market has continued its march towards becoming one of the established methods of achieving returns on investment.
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Binary Options History: 15 Previously-Unknown Facts
Fact 1: The Chicago Board Options Exchange (CBOE) was formed in 1973. That same year, binary options debuted on this exchange as OTC derivative assets. Only institutional traders could participate in these OTC trades as the market was highly illiquid and require lots of money to be able to hold positions. Self-regulation was the method by which market regulation of participants and brokers was performed.
Fact 2: Despite the proliferation of binary options platforms in Europe, binary options history shows that these derivative options had their origins in the US. In 2008, the US Securities and Exchange Commission granted regulatory approval for the trading of exchange-listed options that could be traded on a yes/no basis for each prediction. These prediction-based “all or nothing” options were to be carried out strictly on assets that were listed on American exchanges.
Fact 3: The first retail binary options instruments were offered by the American Exchange (AMEX) in May 2008. In the same year, the North American Derivatives Exchange was formed when the IG Group paid $6million to take over HedgeStreet, a company which offered retail binary options and spread-based contracts in stock indices, forex and commodities. This move saw the emergence of NADEX as the first major retail binary options provider. However, the IG Group was only able to get regulatory approval for NADEX to begin offering binary options contracts to retail clients in 2010.
Fact 4: The CFTC approval granted NADEX in 2010 also allowed NADEX to offer binary options to consumers on an intermediated basis. This meant that third-party brokers and Futures Commission Merchants (FCMs) could offer binary options to US clients using NADEX as an intermediary exchange.
Fact 5: European-style options were offered for the first time in 2009 by AnyOption, which presented a proprietary binary options platform to the market. BetonMarkets, later renamed Binary.com, also came on stream with its own binary options offering presented via a unique proprietary trading platform. Both platforms were web-based.
Fact 6: Contrary to popular belief, the more popular platforms which were created out of turnkey software did not hit the market until 2010, 2 full years after the market was established in the US. These Europe-based companies saw the market opportunity and decided to offer European-style binary options. These were derivative “asset or nothing” options which were not necessarily exchange-based and could be traded on online platforms using software provided by brokers in the industry. This period saw the development of the first binary options retail platforms by companies like SpotOption Ltd and Tech Financials Ltd and led to the market entry of now-defunct Banc de Binary, 24Option and OptionFair. Majority of these companies setup shop in Cyprus, Malta and Japan, as these were already established investment havens for companies in the forex market.
Fact 7: Many countries, unsure of what to make of these derivative instruments, preferred to list binary options as gambling products and left them to the supervision of various gambling commissions. This was the case in the UK and Malta.
Fact 8: SpotOption Ltd has more than 300 white-label partnerships and presently controls more than 70% of the market share of binary options brokers/traders. However, many unregulated entities are now performing brokerage business due to lack of clear-cut regulatory mechanisms. To put an end to this, regulators of financial markets in Japan, Malta and Cyprus were forced to recognize binary options as financial market derivatives, thus making it legally possible to regulate binary options in these countries.
Fact 9: By 2013/2014, Israel had become one of the hottest binary options trading hubs with some of its binary options start-ups posting revenues of up to $10m a year. However, the number of companies implicated in binary options scams also grew exponentially.
Fact 10: NADEX reported an increase of 54% in its trading volumes between April 2014 and April 2015. This coincided with the overall global increase in number of binary options traders. By December 2015, the Financial Futures Association of Japan (FFAJ), Japan’s binary options regulator, reported that active binary options accounts in the country had exceeded 336,000.
Fact 11: It is no longer legal in Japan, Cyprus and Australia for brokers to award bonuses to binary options traders. Originally created for the benefit of both traders and brokers, many scam brokerages have abused this over the years, leading to the clampdown. If you trade with binary options brokers who claim to be regulated in these countries and they still try to sell bonuses to you, you are better off avoiding such brokers.
Fact 12: Regulators in the US, Australia and Japan have all imposed bans on foreign companies soliciting clients from their countries. This is aimed at further strengthening regulation, as regulators can better deal with companies within their areas of operation.
Fact 13: Use of mobile versions of binary options platforms is increasing. SpotOption, the number 1 trading platform maker in the binary options market, reports that there had been 5 million downloads of mobile versions of its platform by February 2016.
Fact 14: Do you know that 2016 saw the listing of Tech Financials Ltd on the London Stock Exchange with an initial valuation of 18.6 million pounds, making it the world’s only publicly quoted binary options company? The company has largely played catch-up to SpotOption in the race to sign up binary options brokers and is now extending its tentacles into the UK and African market.
Fact 15: Binary options is presently undergoing a massive clean-up effort in many countries. One challenge that the binary options industry is undergoing at the moment is the proliferation of many companies that are running huge scams and ruining the reputation of the market. The proliferation of the scam companies has occurred as a result of the slow action of regulators to clearly define regulatory protocols for the market. While some countries such as France, Belgium and Italy have banned binary options trading, some other countries are adopting a more balanced approach at cleaning up the market.
For instance, Japan has clearly defined rules of operation for binary options brokers, and Tradologic has begun construction of brokerage platforms specifically for its Japan operations. Malta has imposed capital requirements for binary options brokerages, and Israel is about to draft legislation which will criminalize certain practices being perpetrated by brokerages operating in the country. Recently, arrests have been made of brokerage owners who participated in schemes to defraud customers. The regulator of the financial markets in Cyprus is also wielding the big stick. CySEC has withdrawn the licenses of brokerages such as Banc de Binary for perpetrating practices which have been deemed inimical to the survival of the market.
These clean-up efforts are aimed at sanitizing the entire industry and bring it to par with some of the established financial markets. While this surgical operation is being carried out, traders may feel some pain. This is all for the best, as the industry is not only growing, but creating spin-off businesses which are putting money into the hands of companies and individuals who are not even core traders. For instance, the market for the binary options software is growing by leaps and bounds. Signals service companies are also cropping up, and developers are coming up with better products that will aid the trading of binary options.
The future of the market indeed looks bright. Ten years from today, it is clear that binary options history will be rewritten to include more innovations and additions to the existing market of today.
Q: When does binary options date back to?
Well it was first accepted for retail trading by the CBOE in 2008. Since then it has become extremely popular to the average person. Before then it was reserved purely for institutional traders that used it as a hedging tool.
Q: Why did the SEC grant approval for this over the counter trading type during the financial crisis?
Answer: An interesting question. The purpose of allowing anyone to start trading binary options at a time of such financial crisis was in order to build up market trading activity when people were scared to lose their savings. The thought was that such a simple to grasp trading type would encourage people to start trading which would help activate the US economy.