If you are contemplating registering with a binary options broker, then there is one not-so-well-known feature that you should investigate fully. Basically, some of them utilize an operational practice that generates a problem called ‘different price’. You are advised to discover if any brokers of interest operate such a procedure because it has been responsible for creating unexpected losses and producing many client complaints in the past.
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How do Binary Options brokers estimate their prices?
Importantly, the mechanism that is accountable for causing ‘different prices’ is definitely not illegal but is capable of confusing traders by supplying them with misleading information. Fundamentally, the core issue of this concern is that some brokers service their binary options trading platforms with their own price feeds.
The major point to appreciate is that, in such cases, the data displayed can differ substantially from that produced by famous quote providers, such as Reuters. This feature implies that such brokers will present prices of assets which can vary from those listed by firms who supply the major financial markets, e.g. Wall Street, with such information.
If your binary options broker did fall into this category, then how exactly would that affect you? Essentially, this means that you must always base your trading decisions on the quotes supplied by your own broker and from nowhere else.
A problem that has arisen in the past is that some investors have based their entry and exit decisions using revered TV program, such as CNBC, which displays quoted prices created by Reuters. If, however, your broker utilizes its own price-feed then such actions are definitely not recommended.
Always question the source of the quoted prices
Consequently, you definitely must confirm with any broker that catches your eye the source of its quoted prices. As this information is not readily provided within the promotional literature provided by a significant number of binary options brokers, many investors, especially novices, are simply unaware of this serious problem. Consequently, experts are expressing the viewpoint that ‘different price’ is both unfair and a risky procedure. Brokers should, at least, make their stance on this issue totally transparent for all to see.
How brokers form their prices in high-frequency-pair-trading
Without a doubt, if a broker operates different quotes from the mainstream suppliers then such an operational practice can lead to frustrations and mistrust if they do not specifically inform their clients. Consequently, many authorities now warn not to use such firms if you discover that such procedures are operative. Instead, you should seek the services of other primary brokers as there are so many others to choose from.
In summary, you may have to alter your trading stance if you do register with a broker that will supply you with a price feed that diverges from those created by the primary quote suppliers that service the financial markets.
This discrepancy cannot be ignored as it could confuse you and make you execute important actions based on inaccurate data.
This issue will take on special importance if you intend to become involved in high-frequency-forex-trading (HFPT), which is conducted utilizing very advanced technological equipment and computer-oriented algorithms to trade assets at an extremely fast pace. Pair options are a variant of binary options which allow you to speculate on the relative trading performance of two highly correlated companies operating within the same market sector, i.e. Shell/BP and Amazon/Apple, etc
How does HFPT trading work?
HFPT is usually based on exclusive strategies that are executed using powerful computer facilities. Unlike normal investment techniques, a high-frequency trade may be active for just fractions of a second. Computers are programmed to implement 1,000s or 10,000s of such positions per day. All trades are always closed at the end of the day. With HFPT, no positions are kept open during the night.
Investors who opt for this variant of trading rely totally on rapid market access and the processing speed of their trades. As such, you must be totally aware of the source of your price feed in order to fully benefit from the advantages of HFPT. This is because you will be targeting just fractions of a cent per position and aiming to enter and close short-term trades at a very high pace. The main intention is that the minute winnings per trade amass quickly during the course of a day to realize a significant and worthwhile profit.
(Risk warning: Your capital can be at risk)
HFTP price measurements
Consequently, you cannot afford any slip-ups caused by ‘different price’ whatsoever. This point is especially important if you appreciate that traders, operating HFPT, primarily compete with themselves to achieve the faster access speeds. The reward-to-risk ratio of HFPT has been demonstrated to be excessively high compared to those associated with the normal class of trading. However, the heavy dependence on new technology has created new types of risk. For example, this form of trading was primarily responsible for the now notorious Flash Crash that occurred on May 6th 2010.
Subsequently, a number of European countries are attempting to completely ban or at least curtail HFPT because of the high levels of volatility that this type of trading can generate. In addition, major USA commissions have advised after completing thorough investigations into the Flash Crash that the usage of HFPT was a definite contributor to this disturbing event as a result of wayward algorithms and ‘different price’.
Binary Options broker prices: brokers provide realtime-quote prices
In conclusion, studies have definitely indicated that success utilizing HFPT is heavily reliant on reducing trading risks, entry sensitivity and responding rapidly to closure criteria. In particular, one issue of utmost importance is to determine if your broker provides the same real-time quoted prices as major suppliers, such as Reuters.