How Do Binary Options Brokers Make Money?

Over recent years, binary options trading has become an accepted form of investment in the financial markets. Unlike the forex market or stock market where the brokers charge spreads or commissions, binary options brokers don’t work in this way. This often raises the question of “How do Binary Option brokers make money?” It’s obvious that binary options brokers are making money, otherwise they would have stopped functioning a long time ago. The question is how and the answer is seemingly shrouded in mystery.

Binary options brokers actually make money through a variety of ways. However, the precise method is dependent on the business model of the broker. One way of making money is through the pricing of the binary options. Another way is through the trading activities of traders.

Pricing Of the Binary Options

Binary options broker normally obtain their pricing structures from their liquidity providers. What many traders are unaware is the fact that the pricing of the binary options that they are trading in is marked up slightly from those in the market. When we want to trade in binary options, we check out the prices of the asset displayed on the trading platform together with the expected payout in dollars and cents. If we pay closer attention, the expected payout is not calculated based on a true percentage payout. A certain portion of the payout is actually retained by the broker and this is the commission that the binary options broker is earning.

Trading Activities

Another way for binary options broker to make money is through the trading activities of their clients.  Let us suppose that Acme Binary Options broker has 500 clients. Let us further assume that 250 of these clients wish to bet that the GBP/USD will go up within the hour and they bet $100 each. The other 250 clients want to bet $100 each that the GBP/USD will fall within the hour. This mean the total money pooled in the market is $50,000. On the trading Platform, the GBP/USD displayed a paid out ratio of 80% if the trade is in the money.

After an hour, we find that the GBP/USD actually ended up. So the 250 of traders that bet for the GBP/USD to rise ended up in the money with $180 each. For those traders who ended out of the money, their return is zero. Hence, the total payout comes to $45,000.  This mean there is a balance of $5000 in the market pool which the broker can walk away with. Our example is just based on one trade of the GBP/USD in one hour. Just imagine that there are 10 to 20 such trades every 24 hours, this mean the broker is easily earning $50,000 to $100,000 per day! If we take that amount and multiply it 5 times a week for four weeks, we ended up with a figure ranging from $1 million to 2 million in a month!

Of course our example above also presupposed that there is a balance between both sides of the market which is unrealistic in the real world. Nevertheless, the example is able to illustrate to us very clearly how binary options brokers makes their money.

VN:F [1.9.22_1171]
Rating: 4.2/5 (99 votes cast)
How Do Binary Options Brokers Make Money?, 4.2 out of 5 based on 99 ratings