What is an Online Broker?
The online trading industry is going through some major changes lately, especially with the shift from Binary Options to Contracts For Difference and the wide adoption of cryptocurrencies as a trading product. Also, ESMA regulations are dealing a big hit to Forex leverage, so trading online is kind of in a tight spot. What does that mean for us traders? Let’s find out.
The Online Trading Trend Is Shifting
In the past, brokers were focused on one or maybe two trading products: you had binary options brokers who didn’t offer Forex or CFDs and then you had CFD brokers who didn’t offer Binaries. It was pretty much straightforward: you want to trade binary, you go to a binary options broker; you want FX, you go to an FX broker. This was possible because each individual product (FX, BO, CFD) had enough traction to bring in enough clients for the brokerage on its own. In other words, brokers could only offer one product and still make enough money for their business to be profitable. But each product slowly became less “powerful”. Here’s an overview of each:
Binary Options. Years and years of scams in the binary options industry have taken their toll on people’s trust and they started to move away from binary trading. Add to this new regulation and bans from authorities, plus the rise of cryptocurrency and the binary industry is now in a lethargic state – let’s not call it “dead” just yet.
Let’s talk about Forex for a bit. This product was certainly the King for a long while, but to be successful, you really needed to put in the work, to study and practice a lot. Even then, the profits would come much slower than in Binary Options where you could make 70% profit or more in 5 minutes. To solve this problem, FX brokers offered very high leverage like 1:500, which means that with one dollar you can take a 500 dollar position in the market. This meant higher and faster profits but also higher risk, and high risk doesn’t sit well with the European Securities and Markets Authority (ESMA), so they decided to limit leverage to a maximum of 1:30. That resulted in many FX traders moving away to other products.
Contracts For Difference (CFD). This is in a way a mix between Forex and BO and it’s the go-to product that former binary options are now offering. It’s easier to trade than FX, harder than BO but not too difficult, so it’s still appealing to BO traders. The main appeal is that you can have CFDs on a large number of underlying assets, like stocks, indices, crypto or commodities, so CFDs have gained in popularity as opposed to the other two (FX and BO) but it is still not enough to be offered on its own. So a brokerage cannot rely on CFDs alone to make a good profit.
Cryptocurrencies. The flashy young brother of Fiat currencies. Everybody is in love with crypto and blockchain technology and this asset can be traded as Binary Options, CFDs or you can simply buy it at an exchange. However, we are not focusing on exchanges in this article and binaries are more or less obsolete so the only relevant way to trade crypto is through CFD. But the crypto market is on a huge slide towards the bottom at the time of writing, so brokers cannot rely on this product alone to make money.
One-Stop Shops
Since a single product doesn’t bring in enough clients, brokers had to adapt and offer them all at once. Brokers that were previously just FX or BO are now offering everything: FX, CFDs, BO, and Crypto. This is the switch from FX-CFD-BO-Crypto brokers to “online brokers” – a one-stop shop for all trading products.
And this raises some questions: when you focus on one product and then suddenly shift to all of them, can you still offer a good service? Sure, there are similarities between all these types of trading, but they are not identical, so can you really trust a former BO broker to give you great FX trading? The answer is relative: if that BO broker was one of the top ones, then yes, they will probably adapt to maintain a high-quality offering. On the other hand, a shady brokerage will not do any better in this new world of online brokers.
What Does All This Mean For Traders?
First of all, we will have to be a lot more careful how we chose our brokerage because there may be a lot of them with sub-par service, understaffed and not well versed in all aspects of trading different products. Sometimes less is more so a great broker that offered only one product can be mediocre when offering 3 or 4 products. Ultimately, we as traders will have to adapt, learn new stuff and diversify our trading into products that are well serviced by brokers.