If you are new to trading and binary options is the first trading instrument you have encountered, the first time most of you will come across the term “liquidity”, will be when your binary broker does not allow you to lock in a certain trade you want to place due to “limited liquidity” or words to that effect. Liquidity, in short, means an abundance of people on a given market that are both buying and selling. In a highly liquid market (like the currency market) you can buy or sell in large quantities without the price being driven through the roof, or alternatively without it plummeting through the floor. When a binary options broker refuses to take your trade due to issues with their liquidity provider you need to know that you are being lied to. The reason they won't allow you to place the trade is that either their risk management system has determined that you are highly likely to win, or that there are a lot of other traders who have already, or are currently trying to place the same trade. This means there are not enough traders on the other side of that trade to offset the risk for them (i.e. an equal, or greater number of traders who are just about to lose their money so that the binary broker in question can pay out the winners).
Now this issue is two-fold and cuts to the core of what binary options trading is all about. This first came to my attention when a reader emailed me about Banc de Binary. He told me that when he asked his broker who Banc de Binary's liquidity provider is, a guy by the name of David Knight informed him that SpotOption provides the company with liquidity.
By the way, this is a question all of you should be putting to your binary options brokers because their responses are EXTREMELY revealing. Skirting the issue or telling you that the information is private should set alarm bells ringing for you. Now a liquidity provider is a bank, or fund of some sort that provides a broker with a pool of liquidity to offer its clients. So say you want to trade gold, your broker's liquidity provider should instantly be able to offer gold in any quantity the broker's customers want and at a competitive price. The same goes for currency pairs and all other asset classes.
Now here's the rub. Binary options brokers don't actually have liquidity providers. Sorry? You say. No liquidity providers? Well how do they offer us traders liquidity if they don't have liquidity providers then smarty pants? Well, I hate to break this to you guys (actually I'm glad to be the one breaking this to you)... Okay, when you place a trade with a binary options broker on, say, gold, I hope you don't think that your broker then goes out and buys an equivalent measure of real gold, from the real gold markets. Or if you are placing a CALL trade on EUR/USD, that they are actually going onto the real interbank network and buying euros for you. This could not be further than the truth. Binary options brokers are only offering you a bet on whether the price of an underlying asset will rise or fall in a given time, no more, no less (actually much less but we're getting to that gradually). Your trade never leaves their computers. It never goes anywhere. They are the market. Or rather, they are the casino.
Back to David Knight. SpotOption is no liquidity provider my good man, SpotOption merely provides Banc de Binary with the videogame platform your “clients” pretend to be trading on. There is no connection to anything real when you trade binary options, with Banc de Binary, or with anyone else for that matter. It's easy enough to prove this. Google liquidity provider and find out some of the names of real liquidity providers (like JP Morgan, Barclays, RBS etc.) then find out who SpotOption is and see for yourselves that if SpotOption is a liquidity provider then I'm a provider of clairvoyant gifts and mystical revelations. Give us all a break guys.
For you to win on a binary options platform, there has to be some other trader who took the opposite position with the same or similar amount of cash, and lost. If this is not the case then your profits come directly out of the pockets of your binary options broker, which is a massive conflict of interests, especially when these brokers then go ahead and offer you investment advice and provide you with signals (more on this later). This and only this is why they sometimes experience “liquidity issues”. Now on the surface there is nothing wrong with this state of play. A bookmaker does the same thing, pretty much, and you can get paid out by a bookmaker if you win your bet. But binary options brokers have been so opaque in their dealing with clients, while calling themselves transparent, and claiming to be some radical investment technology, that now everything they have ever said is under suspicion.
I wrote this article because you need to know what you're getting when you place binary trade. Many people who are fooled into thinking that something real is taking place when they trade with a binary options broker would never have deposited a penny with them if they knew that the broker is the house and no trade is ever passed on to an exchange through a liquidity provider. And if they lie about this simplest of things, then what else are they lying about?
Further reading: Research the term Bucket Shop in order to really get clued in on what kind of outfits you are dealing with when trading with a binary options broker.
Next time we look at who these silver tongued devils calling themselves brokers are and what they really do.
As always email me your thoughts, questions and binary options experiences at [email protected]
All the best,
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.