Can someone explain please: How option brokers make money?

[glmx]

Hi guys, I am not a total newbie when it comes to trading, but I didn't understand quite well one thing regarding binary options trading at brokers like IQ Option.

I assume that they don't actually execute all of the trades their users make, taking the risk on their own but I NEED to know this - are they 100% taking that risk or are they executing some orders that they find too risky for themselves to take. In other words, if I really do manage to continuously win trades and earn let's say couple of hundreds of thousands of dollars a week, would they be executing these trades actually and would be they loosing money in that case, making profit or simply taking zero risk and zero profit in this case.

I am asking this since I need to clarify for myself what kind of value do I provide to IQ Option or similar brokers if I really continuously win a prevailing percentage of my trades and simply be successful at it. I want to clarify if it is, for the broker side of the deal, any different from betting/gambling. I need to know that in case I win the trades hugely they won't be loosing any money.

In it's essence, my concerns here are rather ethical than technical. I don't care much if they don't really execute most of the trades if for those who trade successfully they don't really loose any money,

Hope that my question doesn't sound like it was answered many times already and someone would be kind enough to tell me more about this.

Thanks

 

[sle]

A broker in general takes zero risk, she's simply executing your trade on the exchange or matches you against another client (not in options, though). Most probably (almost definitely in the case of options trading) the other side of the trade is an options market maker who does assume the risk of your position. However, the market maker does not necessarily lose money if you are making money on a trade - he's holding your position in a delta-hedged form and thus he's exposed to the volatility and not direction of the stock.

 

[JSOP]

Can someone explain please: How option brokers make money?

-Commissions, payment for sending orders to certain exchanges to others, margin interest, platform fees, and any other hidden charge that they choose to throw your way. Regardless whether you win or lose on your trades, they always get your money. Think of them as those horse race bookies.

 

[Chewy]

Read the book Reminiscense of a Stock Operator about Jesse Livermore in early 1900's. in early 1900 these brokers were called Bucket Shops. and he was a winner and banned from all Bucket Shops in USA. he took a trip to midwest and would get thrown out after wining a few times. these brokers are running a business to make money. if you win they dont want to have anything to do with you.

you can find a pdf of the book on the internet. the copywrite is long since dead on this old book. so google up the book then add the pdf

however the modern bucket shop over the internet will recognize the few winning traders and simply lay off the bet with someone else and also take an extra position in the same direction as the winner. but they dont like that as it ties up their money and overall is not very profitable. but it does cover them. their big money is made holding the opposite side of losers. that is super profitable. they do not like people who win.

 

[ajacobson]

Binary brokers generally price to their advantage so they have a larger edge. Doesn't assure a profit on every trade, but they have a large positive expectancy. As folks have mentioned exchange traded is vastly different and is agency - acting as your agent instead of principal as in binaries. The last major US broker to have both agency and principal operations was IB with Timber Hill and they sold off Timber. Some binary shops will even lay off some their risk in the listed market when available. Listed is not always a perfect layoff for binaries, but it may help them to mitigate some of the exposure.

 

[glmx]

Thank you for all your replies, @Chewy and @ajacobson that is exactly what I was asking about.

I would love to hear if anyone had any similar experience with this kind of "brokers" like the earlier mentioned IQ Option where you are able to "trade" all sort of things (including some Forex and crypto pairs as well) but you don't get to see the actual orderbook, actually filled orders etc.

Yes they most likely act as a kind of casinos when it comes to executing most of the orders and I just wanted to know if anyone knows what happens when you win more often than not - would they kindly ask you not to come again, as casinos would do or would they simply actually execute some of your trades and protect themselves from any significant loss with this kind of accounts.

This kind of platforms seem to be forbidden in the US but they operate worldwide and even in EU countries.

I know that there were some apps like SparkProfit where you wouldn't be required nor allowed to put any of your money in, you would an amount to trade the markets and they would pay weekly bonuses to the most successful players. As they claimed, they managed to turn activities of the most successful accounts into profit and reward them on a weekly basis even though they did not put in any money and they would encourage those users to win as much as they can. So, I wonder if this would be the case with the kind of binary options of brokers we are talking about here.

Just trying to determine how much this is, or is it any close, similar to gambling for the broker side of these deals for the accounts that keep winning their trades.

Thanks

 

[Pekelo]

however the modern bucket shop over the internet will recognize the few winning traders and simply lay off the bet with someone else and also take an extra position in the same direction as the winner.

First, the OP asked about legit brokers, not bucket shops. Second, although logically your explanation makes sense, in practice riding the winning costumers and fading or keeping in house the losers is much harder. Long time winners still blow up and losers quite often win big.

 

[markuzick]

First, the OP asked about legit brokers, not bucket shops. Second, although logically your explanation makes sense, in practice riding the winning costumers and fading or keeping in house the losers is much harder. Long time winners still blow up and losers quite often win big.

It's not hard at all, assuming the brokers are competent professionals who use prudent money management.

 

[Pekelo]

It's not hard at all, assuming the brokers are competent professionals who use prudent money management.

Really? So tell us, after how many trades do they decide if you are a loser or a winner?

If it is not that hard why don't you go on C2 and follow the winners and fade the losers and become a millionaire?

 

[markuzick]

Really? So tell us, after how many trades do they decide if you are a loser or a winner?

If it is not that hard why don't you go on C2 and follow the winners and fade the losers and become a millionaire?

Haha! You're the one that said it made sense, but that it's still possible to blow up your account! I was using YOUR premise, explaining that with money management that particular risk does not exist. Even if following the consistent winners and fading the consistent losers is a failing strategy, you still won't blow up your account if you don't risk more than you can afford to lose.
BTW: I "liked" your original comment because you brought up an important issue about how even skilled traders can blow up their accounts and bad traders can get lucky - I simply disagreed with your conclusion, if I understood, that using their results to copy or fade their trades must entail the same risk.