Being an American is a great advantage in most cases, especially when traveling abroad. Your money is accepted everywhere and you can travel to any country you please without undergoing much hassle. However, this is not the case when it comes to Forex trading. Trading Forex in the U.S. is not as easy as it is in Europe. This is mostly due to the stringent laws put in place by the National Futures Association (NFA) that are meant to protect U.S. traders. Here are some of the main reasons why most Forex brokers won’t service U.S. traders:
Over-Regulation
For a Forex broker to operate legally in the US, they need to be regulated by the NFA as well as registered members of the Commodity Futures Trading Commission (CFTC). The CFTC works to uphold transparency, financial stability and loyal competitiveness to all FX brokers in the US.
The NFA provides regulations that are quite tough on FX brokers. It has put in place large capital requirements and excessive documentation and paperwork before a broker is even approved to work in the US. While brokers from Europe require approximately $100,000 to $500,000 of locked capital to acquire European licenses, the American NFA requires you to have $20 million to operate in the US. This amount is only correspondent to the deposit the broker has to make. It is not inclusive of tax or any other legal fees required to obtain the license or the employment of lawyers that will be put on the register and executives.
Simply put, the US market is overly expensive for even some of the biggest Forex brokers. Although some brokers make profit enough to afford it, 20 million dollars for licensing is often out of reach. To put this amount in perspective, the world’s 15th largest broker earns approximately 10 million USD in profit annually. Using this as a rough example, this broker would have to allocate two years’ worth of profit to gain the privileges to work in a single country is quite a serious investment. This amount is also subject to increase depending on the increasing number of client accounts and their trading capital.
This, however, was not the case back in 2008. At that time, there was a much larger number of brokers accepting US clients. Today, this number has reduced to less than 5 U.S.-friendly Forex brokers.
Another factor is that the NFA has proven to be a regulatory body that charges very large fines on Forex brokers who violate their regulations. This has both positive and negative consequences for traders in the US.
On the positive side, it is now much harder to find an unregulated U.S. Forex Broker as compared to finding an unlicensed Asian or European brokerage since they are afraid of US prosecution and huge fine implications. As a result, most Forex scams have been kicked out of the US creating a safer trading environment.
On the downside, it has also led to the withdrawal of some great ex-U.S. Forex brokerage firms such as Oanda and Alpari.
Low Leverage Restrictions
You may be thinking that since there are very few brokers in the US serving over 300 million people, more brokers would be scrambling to penetrate the market, but unfortunately, this is not the case. The other reason why brokers are not flooding this market is that most of them simply don’t find the U.S. market to be highly profitable.
Forex brokers make their money from the volume traded. Hence, the higher a trader’s volume, the more profit the broker makes. Unlike in the European market where traders have access to a leverage of 500:1, in the U.S., the NFA does not allow trading with leverage that is higher than 50:1 on majors, and 20:1 leverage on minors.
This is one of the main reasons why most top Forex brokers ceased their operations in the U.S. as they deemed the business conditions to be generally unfavorable. This means that brokers in the US can expect to receive considerably less profit than brokers in Europe for the same amount of traders and the same amount of deposits. Operating expenses in the U.S. are generally much higher as well, making it even harder for the brokers to survive there.
Regulator Attitude
Even though it is already much harder for a broker to start operating in the U.S., and become profitable, historically, U.S. authorities have been seen as a major hindrance. A good number of brokers have been fined heftily by the NFA for malpractice. Often times the fines can be viewed as excessive in relation to the minor violations. The fines can range from $200,000 to $2 million for misconduct.
Indirect Competition
U.S. traders are known to be much more inclined to stock trading than currency trading. In most cases, stock trading is usually more profitable for the broker and more expensive for the trader. As a result, U.S. brokers lack incentive to push traders into the Forex markets.
FIFO and Anti-Hedging rules
Another reason why most Forex brokers won’t pick up U.S. traders is because of the FIFO and anti-hedging rules. FIFO, which stands for “first in, first out” is a trading policy set by the NFA. What this basically means is that a trader is required, by law, to close older trades first, in the case where there are several trades open. Anti-hedging, on the other hand, is a U.S. Forex trading rule that prohibits the holding of both long and short positions for the same currency pair in the same account. The main aim of these rules was to protect new traders from blowing up their own accounts. These rules are regarded by traders, as a major deterrent to freedom of Forex trading.
Bottom Line
It is clear that the limited number of Forex traders in the U.S. is majorly due to the heavily regulated environment which requires brokers to deposit substantial amounts of funds, while also decreasing their ability to make profits by limiting leverage. U.S. regulating bodies have pushed away many of the major brokers looking to business in the country with the abundance of over-regulation, excessive fines, and reporting.
