By Darrell Martin
Recently, Nadex announced December 2016 as having the highest monthly trading volume in its history. Not only was that announcement made, but also it was reported over 70 percent year-over-year growth in trade volume and total trades of binary options during the fourth quarter of 2016 when compared with the fourth quarter of 2015. And there is more! Nadex experienced an overall 50 percent increase in annual trades and volume from 2015 to 2016.
How is this information beneficial to the trader? With the increased demand, this caused the volume to go up 50 percent year over year. Nadex added regulations to tighten bid offer spreads. (For more information, click here.) Additional Market Makers bring added liquidity, which in turn, leads to a drop in the bid offer spread for spreads. This makes a more competitive marketplace that is both beneficial and cost saving for the trader.
Market makers will go where the liquidity is. Their goal is to buy at the bid and sell at the offer. They desire to be delta neutral. They want to make the bid offer spread. Market Makers do not want to be directional. When there is competition between traders and Market Makers on the same exchange, it benefits the trader. Market Makers will stumble over each other to get the bid offer filled in order to unload their risk. In doing so, it brings the bid offer spread closer and closer.
Why Does the Bid Offer Spread Matter? New traders often wonder why they are immediately losing in a trade upon entry. This is because of the bid offer spread. The bigger the spread, the more the market has to move before the trader is profitable. For example, if the trader buys when the bid is at 49 and the ask (offer) is 44, the trade is immediately showing a loss of $5 until the market moves enough to bring the offer up to 49 where the trade was entered. After that point, as long as the market continues to move in the desired direction, the trade will show a profit.
When the bid offer spread is tighter, there is less of an initial gap to fill before a profit can be made. The more market makers available to fill the contracts, the tighter the bid offer spread.
Nadex Activity The increased volume at Nadex means more liquidity, which in turn can draw in more Market Makers causing tighter bid offer spreads. Bid offer spreads have been tightening up on binaries for a while. Take a closer look at them on the spread contracts, too. Commodities, Indices and Forex all seem to have the bid offer spread narrowing. Nadex continues to offer limited-risk alternatives to conventional trading and just keeps getting better!