Binary Options: Avoiding the “Flash Boys”

binary options

The waves created by Michael Lewis’ new book, Flash Boys: A Wall Street Revolt, would have probably been much smaller had 60 Minutes not produced an excellent companion piece to go along with it. It certainly took this kind of one-two punch to hammer home its point: US equity markets are knowingly rigged to the detriment of a majority of investors.

What’s not being publicized, though, are that there are ways of investing that are not rigged, and we’ll discuss those in a moment…

But first, here’s the gist of Flash Boys’ complaint:

What’s the issue: US stock markets currently allow a specific kind of binary trading shop to exploit technology in order to front-run all types of investors – from individuals to major institutions – scalping consistent profits off of them in the process.

Who is doing this: There are several parties to blame. So called high frequency trading firms are the big perpetrators, and the stock exchanges themselves are guilty of not only letting it persist, but providing the capability to do it.

Who is getting hurt here? Is it a victimless crime? There are lots of real victims in this. Everyone who trades who doesn’t possess and optimize the technology at the heart of this scheme is being hurt. From institutions who aren’t “playing this game” to hedge funds and individual investors – all are being victimized on just about every trade they make.

So what exactly is the problem?

The vast majority of stock market activity has moved away from the romantic imagery of traders making markets in individual securities while physically being present on the floor of an exchange. That all still exists, but it’s not where most trades happen. Most trades occur across computerized networks at speeds where millisecond differences actually determine whether or not you get in or out of investments at good prices or bad ones.

Computers and execution speed are not inherently bad things. In fact, they can create a healthy, liquid market where virtually anyone at any time can get in or out of a position.

But it’s when this technology is abused and the abuse is permitted to continue, a small niche activity like flash trading becomes a systemic problem.

What’s actually happening is that a group of high-frequency trading firms are getting a sneak peak at orders being placed before those orders actually reach the computers at the exchanges. Some brokers are unaware that this is happening, and others are actively colluding with high frequency traders and the exchanges to make it happen.

This high-frequency profiteering requires major investment by those who partake in it, but the money to be made is quite literally fast and furious, and virtually perpetual…

A Solution for Individual, Retail Traders

One way to combat the front running of high frequency traders is through the use of Nadex binary options. Here’s why:

  • Nadex does not offer the assistance some larger stock exchanges do that enables flash trading to work on its exchange. Simply put, Nadex does not allow the game to be played
  • On Nadex’s trading platform, the viewing of orders from other market participants within fractions of a second before others is not possible
  • Nadex is designed specifically for the individual trader and enforces strict position limits. Because predatory HFT relies on very large position sizes where they can skim pennies or fractions of pennies, these position limits deter would be predators as it is simply not worthwhile for them to participate

But not only are Nadex Binary Options immune from flash trading, they have additional benefits that other investments do not possess like:

  • Lower Investment Barriers: To buy a single binary option contract, traders need only to have the cash in their trading account to cover the maximum loss (which is known ahead of time)
  • Simplification: Binary options allow traders to focus on direction and timing of the underlying assets – and that’s it. With binaries, magnitude is not a factor
  • Defined Risk: Maximum profit and maximum loss are known before the trade is made.

Story by George McMillan of WallStMavens.Com

Gary Beal