How Binary Options Brokers Earn?

In recent years, binary option became a highly popular financial instrument. Investors want stable earnings when trading them. Binary options are very profitable since they offer high payouts which can be earned for a short period of time. Every investor knows how to benefit from binary options. But few traders know how their brokers earn money.

Don’t doubt that brokers actually make money. The question is how exactly they do that. That’s what we’ll talk about, but we’ll consider only legal, honest brokers. There’s just one thing you need to know about rogue companies – stay away from them.

There are different methods binary options brokers use to make profit. Every one of them is free to choose any method they like as there are no specific standards or laws regulating this. Brokers can make money by taking a share of profits or thanks to the difference between payouts and money collected from traders.

Keeping a Share of Profits

If this method is used, binary options broker basically performs the role of intermediary between its customers, which sign up trading accounts with them, and its liquidity suppliers. The latter are other companies that buy/sell binary options. These are market heavyweights, and they don’t usually work with regular retail traders. Therefore, you won’t have a chance to trade directly through them.

These liquidity suppliers set profit percentages different from what your broker gives you. Binary option offered by your broker can promise you 70% profit. Meanwhile, liquidity supplier can offer the same binary option with 75% profit. This 5% difference is taken by a broker. Thanks to this price difference brokers can earn money.

Difference between Payouts and Money Collected from Traders

Binary options brokers can use another method to get profits, and it is based on traders’ activities. Brokers need to try to make the number of traders buying up/down binary options as close as possible. If everything is done correctly, then any outcome will be profitable for a broker, and after paying out all profits to traders and collecting funds from out of money contracts, there always will be something left for a broker.

Let’s consider an example. To make everything as simple as possible, we’ll discuss a scenario which usually doesn’t unfold in real life. Suppose a broker has 100 customers, 50% of them think that EUR/USD exchange rate will decrease and the rest of them wager on its increase. All of the traders enter by one trade with the same 30 minute expiration time and $100 contract size. Profit is 70%.

At expiration it turns out that exchange rate increased. Therefore, half of the traders who forecasted EUR/USD market to go up will get by $70 profit each. Meanwhile, those who lost have their $100 taken from them. Overall, broker pays $3,500 (50x$70) and collects $5,000. As a result, its income is $1,500.

This is a good method of earning tons of money every month. But in fact, it seems easy only in theory. In reality, it’s an extremely risky business because brokers have to consider a lot of factors. They need to spend efforts in order to pay out less than they collect. Broker can go bankrupt when implementing this strategy because majority of traders can decide to wager on the same outcome. And if their forecast is accurate, broker won’t have enough money to fulfill its obligations.

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