The two images below show a pair of live charts of EUR/USD captured at exactly the same time on a dual monitor set-up by clicking the print screen button once. All I did was cut out the relevant part of the screen and save as two separate PNG files. Of course I could have faked these images so they are only as valuable as the trust you place in them, but what they demonstrate is a common enough occurrence. You can find countless people online making the same claims in forums and comment forms, and/or you can verify what I'm about to say for yourself. All you have to do is compare the prices quoted on a binary options broker's platform to another charting platform displaying live Forex prices. I recommend that you do this.
Now, the first image shows you EUR/USD on Banc de Binary's platform. The second shows you the same currency pair on the cTrader ECN Forex trading platform. As you can see each platform is giving you a different price. Banc de Binary is quoting a “live” price of 1.33414 for EUR/USD. Now let's compare this to the cTrader platform below.
In the second image the cTrader platform is quoting the price at exactly the same time as 1.33406 to Sell and 1.33408 to Buy. I circled both the price on the chart and the price on the Buy/Sell buttons at the top. This is because when trading Forex you don't just get one price, you get one to Buy (or go long) and one to Sell (or go short). This is the spread, and what binary options brokers claim not to have by quoting you just one price. So in the image below the chart says 1.33406 on the right, but that's the Sell price, the Buy price, as I've already pointed out is 1.33408.
Now go back up and look at the first screenshot again. In oversold conditions, i.e. with the price dropping and it looking like a reversal may take place at any moment (necessitating a Call trade or an upward forecast), the trader of binaries is given a price that is a full 8 pips higher than the Buy price on the ECN platform. This means that in order for your trade to expire “in the money” as they like to call it, the market price has to rise above and beyond that spread.
Now let's move on and look at the following pair of screenshots below. These were again taken on the same dual display by clicking the print screen button once a little time after the first pair of screenshots were taken. Things look different as the market begins to change direction. The price that Banc de Binary is giving us below is 1.33566. Now let's look at the next image and see what the interbank network is really saying.
cTrader is offering EUR/USD at 1.33568 to Sell and 1.33571 to Buy. In other words as the momentum of the market begins to change direction Banc de Binary have set their price on the other side of that Buy/Sell (or Bid/Ask) spread. Now if a binary trader decides that EUR/USD is looking as though it may fall, the market must not only drop by the time the trade expires, but it actually has to beat that two pip spread as well. And of course what's at stake here is the entire amount wagered on the trade, because in binary options everything you put into a trade can be lost if at the time of expiry you're even one pip out.
Let me just explain a few things about ECNs (electronic communication networks). ECN platforms theoretically should have no spread other than that which exists on the actual interbank network, in other words there should be no mark-up from the broker you are using. The difference in Buy and Sell prices on ECN platforms represents the true supply and demand of the market. So in the two cases above we can see a very small difference between the Buy and Sell prices quoted. In certain market conditions the spread on an ECN platform can be as low as 0 pips. For more information on the various types of Forex set-ups check this article out on the Agency Model.
The reason I chose to use the ECN platform as comparison is that it's the best benchmark of what is really taking place on the market. The price that you see on cTrader is not just a quote from one liquidity provider but the aggregated best price from a pool of liquidity providers with no intervention from the broker whatsoever.
Now I did not go cherry-picking the above data. I really didn't have to. I just started monitoring both platforms and took two screenshots; one when the market was going down and one when it was going up. So as you can see, binary options brokers claim not to have a spread but they do. At no point while monitoring EUR/USD did Banc de Binary's price coincide with the true market price. It moved up and down depending on what the company's risk analysts believed the most likely to take place next. The price that binary options brokers quote is also influenced by the open positions that traders on their platform. This is so that they always make sure that more people are losing than winning on their platform and that the losers lose enough to pay out the winners. I have personally seen trades kept open for 10 seconds after expiry until the market changed sufficiently to wipe out a position. I've also seen the price change inexplicably, suddenly causing a trade that was winning to expire out of the money. Of course as far as you are concerned this is just hearsay so I don't expect you to take anything for granted until you have verified what I'm saying for yourself.
In this series I have tried to stick the empirical facts. This is not because I don't believe the wilder cowboy moves these brokers have been accused of pulling, most of these accusations are sadly true, but I'm basically trying to build a case piece by piece. At this stage in this series of articles I'm focusing on debunking the advertising spiel that all these binary brokers use. I believe I can turn you off binary options by taking their arguments apart one by one. I will of course go on to discuss some of the more heinous crimes these brokers are responsible for but right now let’s just build our case.
So in this article we've seen that the price quoted on binary options platforms is completely un-anchored to anything in the real world (and I'm not making an example of Banc de Binary here, they're all at it). Binary options brokers use the real market price as a mere guideline and move the goalposts accordingly to suit their own interests. So the most pressing question, the one I would like to leave you with, is: If they can do this, then what's stopping them from moving it a few pips at your trade's expiry to make sure you lose? I think you've already figured out the answer to that question. Keep reading.
Next time we look at something I already touched upon in this article, Binary Options liquidity and how it's the biggest joke in the world of online trading, or rather online gambling. Hope this article was helpful to you.
Feel free to share your experiences with me by dropping an email to [email protected]
Take care till next time.
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.