Index Binaries - Problems esp Aus Index

[Thinker]

I have been trading index binaries for quite some time now. I have traded the Germany 30 and Wall St. but mainly the Aus Index.

I have been concerned now for some time regarding pricing, timing and charting included in the binary information. For the purposes of this discussion I will refer exclusively to the Aus Index.

 

Apologies in advance for the length of this, however, I have been attempting to trade the binaries for quite some time with some degree of success but also failure in certain areas. I have provided as much detail as I possibly can so that my areas of concern can be addressed.

 

These are the concerns that I have:

1. The spread.
I understand the need for a spread, however, the amount of the spread seems to me to be somewhat random and, frankly, far too wide. Given that the price will vary between zero and 100 I have often witnessed spreads such as 18 and 27, a nine-point spread (and sometimes greater). When looked at as a percentage nine as a percentage of 18 is 50%. This is a very significant spread. It seems to me that most often the spread is in the vicinity of 7 points. I query why it is necessary to have such a large spread particularly when you have a pricing of, say, 1 and 8. Given that 4.5 is the median point why could the pricing not be, for instance 3.5 and 5.5. Two points is still a significant percentage spread in such a market. Times of extremely high volatility can obviously affect spreads but in a highly traded market even volatility should not affect the spread.

 

2. The percentage change figures in the "Prices" window.
There are two markets for binaries on the Australian index, the 20 min market and the hourly market.

The first thing is that there is a lack of consistency in the prices window for these two markets. In the hourlies the "percentage change” column has an indicative digital figure of the index such as "5234.5” but in the 20 min market the "percentage change" column has a figure such as plus or -2. The hourly market also has a plus or minus figure in the "change" column. The only exception to this is between midday and 1 PM where the "percentage change" column of the 20 min market has the same as the hourly market, an indicative digital figure of the index. At all other times of the day the "percentage change" column of the 20 min binary just has a plus or minus figure not an actual price estimation of the index. Interestingly, in the 20 min market the "change" column and the "percentage change" column has slightly different figures in that the percentage column is to 2 decimal places.

However, if you look at the relatively recently created charts for the binaries they have a moving line and a digital figure corresponding with the value at any particular point. I have noticed, however, that this digital value can be significantly different to the digital value given in the prices screen when presumably both are supposed to be indicative figures. I cannot for the life of me understand how or why these two figures could be different. I have seen a variation of up to 14 points in times of high volatility and even five points when not so volatile. Given that the strike prices may be as little as five or seven points apart this is a very significant error in the representation of the price. Let's face it one of the two prices has to be wrong if not both. I believe that it is so significant that one or other or perhaps both of the indicative prices are effectively meaningless. One cannot tell which one could possibly be correct. In fact I have seen on the chart a particular price a second before the expiry of the binary to be a particular figure and then the close price can be up to 3 or four points different where there appears to be no significant move at the time in the underlying market.

 

Given that one 10th of a point can make the difference between a binary expiring at 100 or zero I believe that these figures should be more accurate than just merely some approximation.

 

The other interesting point about the indicative prices given is that they are not the Bloomberg prices which is the price at which the settled price is determined. They are some compilation of an indicative feed of the SPI and other factors as I understand it from IG support.

 

3. Closure of binaries before expiry.
The 20 min binaries and the hourlies close 1 min before expiry. I have noticed, however, that they very frequently close a few seconds before the 1 min. I have seen them close up to 6 or 8 seconds early on a very regular basis and have on a number of occasions been locked out of closing a trade with a few seconds to go. It is completely unacceptable if the "rules" state that the market closes 1 min before expiry but it in fact closes 1 min and 6 seconds or 1 min and 8 seconds before expiry. That sort of thing should never happen but it does happen constantly. A market should not be closed before it is actually supposed to be closed.

 

4. Final pricing (settled basis).
The final settled price is supposed to be the price as reported by Bloomberg. However, in discussions with IG support they have informed me that they could not afford to provide the streamed Bloomberg figures during trading. I agree with the underlying premise that an independent authority (such as Bloomberg) should set the final settlement price. However, I do not believe that you should have a situation where that authority’s figures are not available on the same trading platform to be viewed during the course of trading. The indicative figures as stated above have no real bearing on the Bloomberg figure. To this I say there are many different authorities (for example Morningstar) who could set the final price for the purposes of the IG index trading but I am sure that they would be prepared to negotiate a very reasonable fee (if Bloomberg isn't) to provide the feed to IG so that it could be displayed in conjunction with the binary prices so that it is quite clear what the real and actual price is rather than some inaccurate conglomeration.

 

5. Summary.
In view of all the above I am not at all convinced that the provision of the Aus Index as a binary product is a product of merchantable quality and therefore should not be represented as such.

 

I do believe, however, that if substantial changes are made such as some of those indicated above, the product could be a good product. At the moment I don't believe that it is.

 

All products sold or available for sale in Australia are required to be of merchantable quality under the provisions of the Competition and Consumer Act 2010. I don't believe some of the index binary products are. I believe that changes as described above need to be made or I believe, unfortunately, the product should probably be withdrawn until such time as it can be fixed. I would like to keep trading them but I think I and anyone else would be a fool to do so believing that they would make a profit over time given the uncertainties and anomalies.

 

[Guest TimP]

Hi Thinker,

 

Thanks for getting in contact and do not apologise for the length of your query as we can fully appreciate a complicated matter might not be able to be simply put. I have spoken with James who works on our Binary options desk and he has come back with the following:

 

'Hi Thinker,  I understand the rationale for all of your questions and I’ll try and address your queries as best I can. Should you have any further questions do let me know and I will be glad to be of assistance.

 

1) Spread

 

I completely understand your confusion at the “random” nature of our spread and will try and explain the context of how our spread varies on our Australian index binaries.

 

As you mention in your post, spread is necessary as it is how IG generates revenue in Binary markets.

Spreads in the Binary Indices markets (ASX included) have a minimum and maximum value and proceed to their maximum value towards the end of the period. In addition to this, maximum spreads are found at strikes close to the underlying market level and minimum spreads are found at strikes away from the underlying market level. This is because prices are most sensitive/volatile when the underlying market level is close to the strike and/or close to expiry.

 

As an example, if the ASX is at 5200, the “ASX to be above 5200” ladder product would be nearer maximum spread, whilst the ladder “ASX to be above 5300” would be nearer minimum spread. 

 

Minimum and maximum spread values differ according to each Index and each Index Product, but to give you an idea of the approximate values we use; at the time of writing: 

 

ASX Ladders – Min Value: 2.5 Max Value: 9.5

ASX Touches – Min Value: 6 Max Value: 20

ASX Ranges – Min Value: 2.5 Max Value: 12

 

 2)  The Percentage Change Figures in the “Prices” Window

 

The “Change” and “% Chg” columns are hard-coded to the platform which means that unfortunately the values shown may not reflect the column headings, as we are unable to change the wording of the headings themselves. This is definitely something we are looking to modify in the future. However, in the meantime, we try to provide values that relate most to the product traded, e.g. For our hourly and 20 minute products, we display the net changes for the product’s specific period rather than the products absolute net change during the overall daily session.

 

We have looked at the percentage change figure errors that you have brought attention to and as a direct result of your correspondence, we are investigating and looking to implement a universal set of “Change” and “Percentage Change” columns accordingly.

 

 3)  Closure of Binaries before Expiry

 

The closure time for each 20 minute session is fixed within our system and cannot be changed. The closure times may appear different from your side, due to a difference on your computer clock, or due to a delay in data transfer due to your internet provider. As you appear to be experiencing several seconds worth of difference, it is likely that your computer’s clock is slightly different to our pricing system clock, which is aligned with the exchange’s.

 

 4)    Final Pricing (Settled Basis)

 

Products are settled basis the independent cash print or settlement level as provided by Bloomberg. We use independent settlements to avoid any perceived conflicts of interest and provide a clear and transparent service for our clients.

 

We are unable to provide a live cash feed from Bloomberg, due to the agreement we have. In absence of this live feed, we provide an indicative value of where the underlying cash price is using the Index’s front-month future’s fair value-adjusted price.

 

I hope my post provides clarity on the issues you have raised.

 

James'

 

[Guest Zero]

HI Thinker,

 

Interesting post and I'm glad there is someone else who trades index binaries.  I do the ASX200 mainly (due to sleeping hours) - I must admit while I dislike the large spreads, I haven't found any issues to make me either less profitable (well the spread obviously but I understand the need for that) or not want to trade the binaries.  I think IG's binaries are brilliant to be honest. 

Be good to chat more in the future.  Cheers.

[Thinker]

Hi Tim,

My apologies for being so long in replying to you, however, I have been away.

There are a couple of points that I would like to clarify or add to.

 

Spreads

I understand the point you are making on this topic. But of course traders always like to see the narrower spreads and if there is anything that you can do to achieve this, it would be much appreciated.

 

The Percentage Change Figures in the “Prices” Window

Thank you, we would be good if you could fix these issues.

 

Closure of Binaries before Expiry

When I was referring to the time that the binary closes and that it closes six or eight seconds prior to the designated closure time, I was referring to the countdown clock that IG has on its dynamic charts of the binaries referred to above. In other words it is your own clock that shows that the binaries are closing early, not my clock or my computer clock.

 

Final Pricing (Settled Basis)

I am not sure that you have commented very much on this topic.

There are a number of points I was making. Broadly they are:

• The I G Price showed on the binary graphs is very often different to the binary price given in the prices tables under the heading "% change". The point I am making is that if your own calculations produced two different prices in two different places how can one expect to be able to know what the estimated price is? Which one of the two different figures is correct or is this need for solving a problem here?
• I don't dispute the need, and in fact I agree with it, that independent pricing for the “settled at” pricing is required. What I am saying though is that if you can't provide a live price from Bloomberg maybe some other supplier such as Morningstar can even if it is also in conjunction with the estimated price. You would then have to use Morningstar's closing price as the appropriate settlement figure. The point I am making is that there is one estimated price on your binary charts, a different one on the binary tables and the final settlement price with Bloomberg. It makes it hard to trade when there are three different figures for the index value. I would appreciate it if IG could look into negotiating with Morningstar to provide their price even though it may only be updated every 10 or 20 seconds or so. Having the real price at which the binary is settled at being constantly in the prices tables or somewhere on the chart would certainly add to the transparency of using an independent pricing authority. Of course appropriate acknowledgements to Morningstar would be appropriate.

I am quite happy to speak with anyone from IG if they need clarification on any of the issues regarding the binary trading, particularly in relation to the Australia 200. My attitude to these sorts of things is that it is really only the people who use the product that can see the difficulties involved and the more people who can help solve them, the better.

 

Thanks.

[Thinker]

Yes, It would be good to be able to compare nots and trading ideas......

[Guest TimP]

Hi Thinker,

 

We can appreciate where you are coming from and really do appreciate your feedback. James, who is on our Binary options team, would like help out with the points you have made and below is his response.

 

 

'Hi Thinker,

 

I hope you are well.

 

I completely understand your thinking and am more than happy to reply to your additional comments.

 

We regularly review our spreads on all our binaries products and try to find a balance between clients’ requests for lower spreads and being too uneconomical for the business, however we will bear your request in mind in our next review.

 

With regards to your complaint about the closure of binaries before expiries via our graphs, I do apologise as I appear to have previously misunderstood the issue you were referring to. Having now watched several binaries expire on our FTSE and Dax markets via our graphs, unfortunately I can’t see any lag on the countdown clock. Could you provide some more details on this, so we can investigate further? Specifically, does the issue only occur sporadically or on every time period? If it is only sporadically, can you please detail if there is a pattern to when it appears? If possible, a screenshot of this issue would be very useful to our investigation. 

 

On your first Final Pricing issue, again thanks for clarifying. The two figures do differ, because there is a lag induced by taking the raw data and converting it to a graph on your computer. This is mainly related to how long it takes to send the extra data to your screen. The %change column is therefore slightly ahead of the chart data. In both cases, they start off displaying a price mainly from the relevant future, adjusted for fair value and then proceed to show ever increasing proportions of the cash, although as explained previously we can never show 100% of the cash price, due to the aforementioned licensing agreement issues.

 

Whilst I appreciate the preference for a 100% cash feed of the underlying market, regardless of source, such data does have a high price tag (regardless of supplier) making it uneconomic to display it on our platform. Please be assured that we have looked into the cost of this before judging it to be uneconomic! As an alternative, clients can independently arrange to receive cash feeds themselves from the suppliers, but again this is very expensive and I understand is not ideal. We offer the products in good faith and try to be as transparent as possible, providing what we believe is the best alternative (increasing the percentage of cash price we show as much as we can) and settling all binaries and independently as possible. We hope that this shows through our products and that we earn your trust through doing so.

 

Please do let me know if you have any more queries, or if you would like a quicker, more direct response, our helpdesk is open 24 hours a day through weekdays and daytime hours on weekends.'

 

I do hope James has clarified what you are looking for and should there be anything else we can do to help out please do let us know.

 

Thanks

 

Tim

 

 

 

[Thinker]

Thank you, Tim, for referring my comments to James and thank you James for your response.

 

My comments in my post relate to the Aus200 and not necessarily ALL index binaries and it is those binaries (the 20 min and 1 hour) that my comments specifically relate to. So you will see in the Aus 200 count down clocks that the trading ceases about 6 to 8 seconds before the 1 minute cutoff.

 

However, things such as spreads and other general comments can be applied to Wall Street and the Germany 30 indices as well.

I appreciate your responses and my comments are made as a trader who actually uses them in practice which is the benefit of these forums as the feedback from those who are using them in practice is the only way you can be made aware of problems or issues.

 

I am not quite sure that the time in processing the data to the charts can be the only reason for the differential in pricing between the percentage change column in the tables and the figure on the charts. The reason for this is that even as I was typing this response I was watching the graph compared with the table and at one point there was approximately 10 points difference when the table went to approximately 5084 and the chart was at 5074. When the market turned down, if it was simply a delay in processing of the data one would have expected the chart to eventually reach 5084 before turning down, however, it didn't but retraced after reaching approximately 5078. For this reason it makes me think that it is a difference in computation.

 

Hopefully the above is of assistance to you.

 

The main benefit of binaries, of course, it the ability to limit risk.

[Guest Zero]

Hi Thinker,

 

I just re-read your post and noticed you focus on the 20min and hourly binaries.  I assumed you were trading the daily and 1pm binaries, with all the different types of binaries for those time-frames - which is what my comments we referring to.

I haven't looked closely at the 20min or hourly - I think I had a look at the sprint markets and thought you could do better with an outright CFD ie. futures trade, so stuck to the other binaries.

 

I have often wondered about the price IG gives for the underlying, especially for Wall St binaries which seem hugely different (like 20pts in volatile closing markets) from a free-web based cash price for that index that I wonder - are IG giving much more detail for the price thereby capturing more of the volatility, or just using some other form of estimation?  I agree - watching this can be offputting, and it is there so you can't help notice it.  Yet in all fairness I understand IG's position on this, and guess they are doing the best they can without the extreme cost of a Bloomberg live feed.  

 

I wondered though - why Bloomberg and not the ASX?  Maybe they pay for Bloomberg for other (non-ASX) markets...

 

Another thing I wonder - in relation to spreads - how many clients of IG trade binaries?  I hope more do so that the spreads narrow.  And seeing as this is an in-house made market, the more traders the better for IG.  I'd love to see a breakdown of the profitability of binaries - ie. % made from spreads and % made from winning positions.  Just curious.

 

Might have a look at those 20min/hourly binaries next week. 

[Guest Zero]

Had a good look at the 20min binaries over the past two days - they're great!  Amazing the risk-reward offered on a 20min basis.   I can't recommend them, and binaries in general, highly enough. 

I guess you still need to have a bit of experience trading - and the psychology of trading can be amplified with binaries.  But it's worth investigating in my opinion. 

Good stuff IG !!

[Guest TimP]

Hi,

 

I spoke with Nicholas who is on our Binary options desk regarding the points you would like clarified. With reference to your query about Bloomberg it is used as it is internationally trusted and it reports clearly and reliably. They do not charge us any extra other than the direct cost of the exchange access that they have to pay. 

 

With regards to the Wall Street binaries, which is composed of the futures and cash prices, it will proceed towards the cash as the expiry approaches. The futures on the Dow can be very volatile close to expiry which is why prices can move alot. 50 point moves can be common and so we actively price them. The price will update much faster and capture more information than the free feed.

 

Futures prices react far faster to moves than the original cash price which is one of the main reasons for using the blend of cash and futures pricing and again that independence of settlement is something we uphold to the highest of our ability so the product is as fair as we can possibly make it.

 

I do hope that helps and if there is anything else you would like to know then please let us know.

[Guest Zero]

Hi Tim,

 

Thanks for the follow up. 

 

You're not wrong in saying the price of the futures can move much more than the underlying cash!  It's nuts - and with the automation these days it seems even more extreme (than a few years ago).  There's not much hope for a human these days ?  An interesting topic for another day.  I am an old school manual trader so for me it's all or nothing when I pull the trigger. 

Cheers.

[Guest Zero]

Just another tip - using partial fills (the new feature) works great with binaries and is personally recommended!  Definitely a great feature.  Obviously the points through feature doesn't make sense with a binary and how it is priced, so that doesn't really apply.  Yet partials - yep.!

[Guest TimP]

Hi Zero,

 

As you well know we really do appreciate your feedback and the points of view you have and we are glad to hear you are enjoying the partial fills feature.

 

Keep those suggestions coming!