NADEX or the North American Derivatives Exchange, is one of a handful of exchanges licensed for binary option trading in the US. I purposely didn’t call NADEX a broker, because operators called “brokers” in the EU/CySEC sense, cannot obtain a license in the US.
So why should US traders choose NADEX?
On one hand, there’s not a large selection of exchanges they can choose from. There’s NADEX, there’s Cantor Exchange (CX) and there’s the Chicago Board Options Exchange, and that’s about it. Of those, only the first two are really dedicated to online binary option trading, and of them, for the time being, NADEX is the best pick. Why is that? There are several factors pointing in NADEX’s direction here: Availability, Regulation and Liquidity.
As said above, NADEX are the most straightforward choice for US-based online binary option traders, because they’re there. They are fully regulated by US financial authorities and they essentially carry the flag of binary options in the US. For someone looking for a legal and safe binary option destination in the US, NADEX is the simplest and straightest answer.
Regulation is another major factor working in NADEX’s favor. US regulation isn’t just strict in the general sense, it only allows a business model it deems entirely fair. In this respect, there are indeed major differences in regards to the business models used by US and EU-regulated brokers. Brokers licensed by Cyprus’ CySEC and other European financial authorities, work on a business model which allows them to be the sole market makers. What this means is that such operators will be solely responsible with the setting of the prices and thus, they will in essence trade against their own clients. If you sense a major conflict of interest there, you’re right. It is in fact this conflict of interest which disqualifies CySEC brokers from US regulation.
In the US, only the exchange-based business model is allowed, of which CX is the perfect representative. At CX, every market participant is a market maker as well, meaning that traders themselves set the prices. This way, the above described fundamental conflict of interest is eliminated from the equation. Of course, this model gives birth to a slew of problems, and lack of initial liquidity is one of them.
In order to understand why NADEX is superior to CX, we need to actually take a look at a comparison of the two. NADEX are focused on retail traders and investors. Their whole trading platform and the whole system is set up to reflect this focus. CX on the other hand, are apparently more interested in drawing technology providers and white-label solution creators as well as buyers to their platform, thus offering CySEC brokers a sort of path into the US market as well. This approach is certainly not without its merits, though the problem with it is that coupled with a pure exchange-based business model, it isn’t exactly a boon to liquidity. This is the reason why CX only have a few tradable assets. They have few market makers and thus no prices on a bunch of assets, so those cannot draw in other traders who would also be price-setters. It’s a sort of chicken and egg conundrum.
NADEX on the other hand, have opted for a sort of hybrid approach. They have two market makers and thus – although they compromise the integrity of the pure exchange model, thus potentially drawing the ire of the regulators – they have plenty of liquidity and tradable assets.
A US-based retail trader, who has a system for the trading of a given asset, will quickly turn away from an exchange which does not support the said asset, especially if there is a viable alternative at NADEX.
Last, but certainly not least, we have the advantages of regulation.
NADEX, like all US exchanges, is heavily regulated and it is therefore one of the safest destinations for the trading of binary options anywhere. While its appeal is mostly focused on US-based traders, it isn’t lost on Europeans either. In fact, everyone can trade at NADEX, under the protective umbrella of strict US regulation.
In the case of CySEC brokers, the possibility of fraud, or just unethical behavior within the rules set by the regulator, is always there. Due to the business model, CySEC brokers are directly harmed by traders who are too successful. Indeed, the theoretical possibility that a very successful trader might drive the broker right into bankruptcy, exists as well. With US-based exchanges like NADEX, there is no such threat. Some traders make money off other traders who lose money. If it weren’t for the commissions and spreads charged by the exchanges, it would all amount to a zero-sum game. In a word: the exchange simply doesn’t care who wins and who loses and how much money is involved in this “game”.
Some – often unregulated – offshore brokers offer binary options to US traders as well. These are all highly dubious operations, so picking NADEX over them is a no-brainer indeed.