Binary Options Exchange Trading & Non-Exchange Trading
A lot of newer traders are curious about binary options exchange trading, and how it differs from other binary brokers.
There are essentially two types of binary options brokers. The first type if the most common type, and it basically involves traders wagering against their own broker since most brokers take positions opposite of the trader. The second type are binary options exchanges where traders wager against other real traders.
Many traders consider binary options exchanges a safer alternative. The main difference between the two types of brokers is the way they make their money.
What Is Binary Options Exchange Trading?
In the US, binary options exchange trading is also referred to as CBOE betting, (Chicago Board Options Exchange.) Basically, traders make bets on the financial markets against each other.
For example, a trader thinks the value of USD/JPY will have increased by the end of the day, another trader sees this traders bet and believes the exact opposite.
They both agree on the same amount to wager. Whoever is accurate and wins the trade keeps their invested amount and the opponent’s invested amount. The broker makes money by taking a small commission from both parties.
Exchange Trading vs. Non-Exchange Trading
In non-exchange trading, whenever a trader makes money from a trade, that money comes from the broker. When they lose, the money is kept by the broker. It’s easy to see how some binary options brokers have a vested interest in traders losing their money.
Under the exchange trading model, the broker does not care who wins the trade because they make their money no matter the outcome.
Exchange Trading Pros and Cons
Overall, it makes little difference if a broker is using exchange trading or not, so long as that broker is regulated and carries a positive reputation, then traders should have nothing to worry about.
But exchange trading does have its own advantages and setbacks.
- Broker does not care if a trader wins or loses
- Safer, completely legal
- Able to see other traders predictions
- Traders only need to be smarter than the person they’re trading against
- Not always easy to find trades
- Good trading opportunities is determined by the number of traders using that broker (market liquidity)
- Requires an excellent level of timing and market psychology