The Forex industry has experienced immense growth over the years, and we believe that it will continue to thrive in the coming years. The great thing about trading currencies online is that you can do it anywhere, at any time.
However, before you can enjoy the profitable world of Forex, you will have to invest time and effort in finding the right Forex broker that matches your needs and preferences. If you’re staying in European or Asian regions, there are many brokers available at your disposal. But it’s a different story if you’re living in the USA.
The Forex trading industry and US Forex brokers are highly regulated. There are only a few brokers available. This is because before brokers can enter the US market, they must obtain a license from the National Futures Association and must register with the Commodity Futures Trading Commission, which is not an easy task.
Another thing that brokers should take note of is the Dodd Frank Act. If you’re quite new to the Forex world, we’ll discuss in detail what this act is truly about in this blog.
Dodd Frank Regulations
For those who have no idea, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in response to the 2008 financial crisis – to prevent another financial meltdown from happening. Basically, the act aimed to create a safe financial system among the US people.
While the legislation has done a good job of providing a safer environment for investing and trading, the Forex industry in the US has suffered a huge negative impact. The more stringent regulations have pushed several Forex brokers away from the US market. They decided to shift their operations offshore because of the expensive compliance fees, and fear of getting fined heavily.
Decline in Daily Forex Volume
Let’s see some numbers on how the act really affected the US Forex industry. In a study conducted by research firm Aite Group, the share of the US in the global daily Forex volume declined to 3% in 2016 from 6% in 2009. Also, before the financial crisis struck and before the Dodd-Frank was enacted, there were about 40 Forex brokers in 2006. This number was cut to just 3 after the law was passed.
Forex broker CEO FXCM Drew Niv revealed that U.S.-registered brokers spend $10 million annually on increased regulatory enforcement costs related to Dodd-Frank requirements.
Furthermore, in order for brokers to be regulated by US financial agencies, they must meet a certain capital requirement. If the European agencies require FX companies a locked capital of just $500,000 to $1,000,000, the NFA requires a much higher capital requirement at $20 million. You see, the difference is so huge. This is only the required clocked capital. The fees to obtain licenses are not included yet.
Indeed, it’s expensive to offer trading services to US clients. For smaller or start-up brokers, entering the US market just simply won’t work.
Limited Options for US Traders
As mentioned earlier, Forex brokers avoid the US market because of its stricter regulations. For example, Russian international broker Alpari left the US market in 2011 to shift its operations in countries with looser restrictions and regulations.
The stricter regulations of US financial agencies have resulted in US traders having limited options of brokers to trade with. The shortlist of licensed Forex companies operating in the country include TD Ameritrade, IG, and Forex.com.
However, because these brokers must comply with the NFA and CFTC’s rules, traders experience trading limitations as well. For instance, the NFA allows brokers to offer a leverage of only up to 1:50, which is significantly lower than the 1:500 average leverage offered by Forex companies outside the US. The lower leverage limits the trading capability of traders. Now, this also has a huge impact on brokers’ income. If traders can only trade in lower volumes, that means profits are also low.
Lastly, there are limitations when it comes to trading strategies. EU-regulated brokers are allowed to offer their clients almost all strategies they want to use. However, US brokers must adhere to NFA and CFTC rules that prohibit the use of certain strategies like hedging. In simple terms, hedging is when a trader opens a new position in the opposite direction of their losing traders.
This content is brought to you by Natalya Oblonskaya.