Commodities Options Trading in the Era of Dodd-Frank

Commodities Options Trading in the Era of Dodd-Frank

binary-byte-2US binary commodities options traders have been stymied since the implementation of Dodd-Frank legislation last year. Beginning in July 2011 binary option sites began winding down their operations with the last contract going offline at year-end.

Today US investors do have some alternatives in the commodity space. Here we take a look at how Dodd-Frank changed how contracts are traded and what traders are doing to continue to invest and make money with binary commodities options.

Dodd-Frank Cuts Off Order Execution

Many US investors in binaries were caught off guard last year when their brokers discontinued offering positions on their favorite precious metals like gold, silver, platinum, and copper. Similarly stymied investors were those operating in the Forex space. What was the common cause for their sudden inability to trade their favorite assets? Unfortunately the common cause was specific clauses in the financial legislation which prevented order routing on the back-end of contracts.

While no specific law or rule prohibited the sale of these securities, brokers were no longer able to legally route orders for these futures related contracts. As a result the brokers had to (one by one) discontinue offering contracts as their back-end trade partners were no longer able to route orders for them.

US Residents Left Out of the Market

It was not long ago that a major market maker in the binaries space folded up shop, according to sources at the CBOE in Chicago. Although there is no specific evidence as to why the market maker discontinued operations in the space the timing of the shut down (just after Dodd-Frank rules began taking effect in April 2011) is probably not a coincidence. Other firms remained open for business however – allowing at least some binary trading activity through year-end 2011.

Once the last firm shut its doors to US residents the only known alternative at the time was to form an off-shore partnership and or establish residency outside the United States. Failing that the Forex and commodities options trading space was closed for US residents.

Traders Await Rules Clarification

As previously mentioned the trouble for US residents trying to trade Forex or commodity option contracts was not the expressed prohibition of the practice, only the inability of their brokers to legally route orders. Like many financially related laws, many of the details of implementation are left to industry regulators (such as the SEC) to write and implement – with time for commentary from the public and interested parties. Many of the leaders in the binary trading space fully intend to offer assets again to US residents once the rules get finalized – or the law gets repealed in whole or in part.

In the meantime one way US residents have been quietly able to keep actively making money with binary commodities options is via an alternative asset called a pair option. In our Stockpair review we describe in detail what assets are available to trade, what these relatively new investments are, and how they relate to traditional binary contracts.