Forex Trading in the United States
The worldwide forex market is extremely liquid, with an enormous daily trading volume. Furthermore, the market is open for trading 24 hours a day, five days a week, which allows you to set your own trading schedule. Therefore, because of its advantages and conveniences, the forex market has attracted a huge number of investors from all over the world.
However, forex trading in the U.S. is not the same as in other countries. Although the forex market is decentralized, traders in the U.S. have more restrictions than those in off-shore countries. The forex trading environment in the U.S. is heavily regulated, and brokers have to adhere to strict guidelines.
Understanding the United States Forex Trading Environment
The United States forex trading industry is very different from the rest of the world. Primarily, providing forex brokerage services in the country is not as simple as offering the same services in other countries.
In the U.S., a forex trading customer is defined by the law as any person or entity whose value of net worth is less than $10 million. In itself, the U.S. law is intended to safeguard the interests of small investors.
Regulation of the U.S. forex trading industry was tightened in response to the worldwide financial crisis of 2007-2010. In 2010, the Dodd-Frank Act was signed into law to patch up business activities on Wall Street and safeguard consumers from exploitation. However, its passage resulted in the downfall of several U.S. forex brokerage firms.
In 2006, there were about 50 brokerage firms offering forex trading services to customers in the country. However, following the sweeping Dodd-Frank legislation, that number has reduced significantly. The law also forbids forex brokers from other countries from recruiting U.S. customers.
Since the implementation of the Dodd-Frank Act, the U.S. market share in the forex industry has reduced considerably. In 2009, the country’s share of the worldwide retail forex trading volume was 6%. In 2016, that share had decreased by half to 3%.
The U.S. government has stipulated strict regulatory requirements that brokers (including introducing brokers) interested in offering services to customers must adhere to. Before allowing U.S. citizens, the brokers must be registered with the NFA (National Futures Association) and regulated by the CFTC (Commodity Futures Trading Commission).
The NFA and the CFTC define the regulatory framework that upholds transparency, honesty, and protection of different market participants. Together, the two agencies ensure the U.S. forex industry is as fraud-free and fair for all as possible.
The existence of much stricter rules in the U.S. has made the forex industry to thrive in places with more relaxed regulations around the world.
Role of the CFTC and NFA
Created in 1974, the CFTC is an independent U.S. government agency that is tasked with ensuring transparency and integrity in the financial markets by preventing risks such as fraudulent market activities, manipulation of market conditions, and financial malpractices.
Here is a screenshot of the CFTC website.
Since the market chaos of the 2007-2010 financial crisis, the agency has been introducing strict operating protocols that govern the working of brokers and other financial firms within its jurisdiction. Ultimately, CFTC aims to enhance the overall trust and confidence among traders concerning the safety of their funds and trading capital.
To eliminate fraudulent activities in the U.S. forex market industry, the CFTC continually updates its online scam list as well as the RED List (Registration Deficient List) with the latest deceptive incidents. If a broker is regulated by CFTC and is caught violating any regulations, the agency will take the necessary actions to protect investors, including enacting heavy fines and sanctions.
On the other hand, the NFA works under the CFTC to maintain the integrity of the U.S. financial markets. The NFA was established in 1982 self-regulatory organization. The CFTC requires forex brokers and many other forex firms to be registered with the NFA.
Here is a screenshot of the NFA website.
Instead of regulating brokers and other financial arms directly, the CFTC extends much of that responsibility to the NFA. The NFA is tasked with regulating the activities of any person or company intending to take part in the U.S. financial industry.
Both agencies collaborate with each other to supervise the actions of the member firms and ensure adherence to transparency and fraud-free conditions. They also take part in handling consumer dispute resolution issues.
Nonetheless, each forex trading broker operating in the U.S. should get a registration certificate from the CFTC, even though the NFA watches over the regulation of such firms. As such, the financial activities of a CFTC forex trading broker are appropriately regulated by the NFA. With the dual regulation, possibilities of financial malpractice and investor abuse are greatly reduced.
U.S. Forex Trading Regulations
a) Minimum capital requirements
The Dodd-Frank regulations, which are administered by the CFTC, have placed very high minimum capital requirements for forex brokers.
Any retail forex trading firm operating in the country must have a minimum capital of $20 million. And, they must have 5% of the amount if liabilities to traders is more than $10 million.
With this minimum capital rule, the CFTC intends that brokers should be capable of sustaining their customers’ positions without being declared bankrupt if the markets experiences unexpected volatility.
Comparatively, the minimum capital requirements in Cyprus, a home for many forex brokerage firms, varies from about $42,000 to about $1 million.
Cyprus has been attractive to most brokers since its European Union membership enable firms in that country to legally offer forex trading services to other countries within the Union while being under less-strict regulation than would be imposed by many other EU countries.
Leverage is what makes forex trading sweet—although it can be a double-edged sword. In fact, the forex industry has largely grown because leverage allows traders with little capital to open trades with a larger amount of money. That’s why some brokers offer enticing leverage levels of up to 1000:1.
However, regulations in the U.S. limits leverage to 50:1 on most major currencies. 33:1 on a few others, and 20:1 on exotic pairs. This restriction was applied to lower the risk taken by investors who fail to understand the disadvantages of leverage properly.
It is true that if used wrongly, leverage can greatly amplify a trader’s losses. Through employing a restriction on leverage, the U.S. regulators intend to ensure traders practice proper risk management strategies and stay away from unnecessary losses. Apparently, this makes forex trading less lucrative to U.S. traders without sufficient capital.
The U.S. regulations make it obligatory for all financial institutions—such as forex brokers, introducing brokers, and fund managers—to be registered with the CFTC and regulated by the NFA before offering their services to clients in the country.
Both the CFTC and the NFA give every forex brokerage firm a unique registration number, which is publicly accessible. The CFTC has a comprehensive online database of fully certified brokers,. NFA BASIC allowss searching for all registered firms and individuals. Before investing funds with a broker, traders can search to confirm the company’s authenticity.
Furthermore, registered forex brokers are required to offer frequent audit reports and financial records to the NFA. The reports should demonstrate how a broker manages its finances as well as the customers’ money.
If you are on a losing trade, you have three options—exit the trade, continue holding the trade until the market changes direction, or open another trade in the opposite direction.
The last strategy is called hedging, and it’s useful for lowering the effect of losses on a trade. For example, you can place a buy order on the EUR/USD if your sell order does not behave as expected.
Regardless of being useful, hedging is not allowed in the U.S. The country’s regulators believe that hedging works to the disadvantage of traders because it makes them pay double spread fees and incur increased trading costs.
In fact, brokers in the U.S. are required to enforce what is called First-in-First-out rule. The FIFO rule obliges brokers to exit traders’ running positions in a single currency pair based on the order in which the positions were placed.
For example, if a trader has two running positions on the EUR/USD, the first order should be exited first before exiting the second one. As such, when a trader tries to exit the second order, the first one will be exited automatically, irrespective of the losses or profits accrued. Again, this regulation makes trading forex in the U.S. less flexible and more difficult, but that’s the way the country operates.
e) Funds security
The security of funds is critical for every forex trader. As such, the U.S. regulators have established several measures to ensure traders do not lose their hard-earned money.
Chiefly, the CFTC has tasked the NFA to ensure that every regulated broker keeps its funds in a segregated account, which is different from the broker’s own operating accounts. This way, brokers cannot escape with the funds if the unfortunate happens.
The NFA directs that every broker should keep its funds with a recognized financial institution within the country. Also, the use of credit cards for funding forex trading accounts is not allowed, but debit cards are.
U.S. Forex Brokers
Despite the strict regulatory environment, some brokers have remained under U.S. regulation and are still accepting U.S. clients.
Here are notable brokers accepting U.S. clients.
Forex.com is a reputable broker that allows U.S. traders to experience the lucrative nature of the forex market. Since 2001, the broker has been involved in providing exceptional trading experience to customers.
It is owned by the NYSE-listed parent company called GAIN Capital Holdings, Inc. The main company is headquartered at 135 US Hwy 202/206, Bedminster, NJ 07921, USA.
Through its years of experience in connecting retail traders to the forex market, Forex.com has gained industry’s reputation in offering reliable and trustworthy services to clients.
The broker has segregated accounts for keeping clients’ funds, offers quality execution on trades, and never takes part in proprietary trading.
Established in 1996 and headquartered in Toronto, Canada, OANDA is an award-winning company that offers authentic, accurate, and reliable access to the highly liquid forex market.
Since its creation, the brokerage house has grown from a tech start-up to a reputable worldwide firm with offices in about 200 countries, including the U.S.
OANDA is registered with the CFTC, and it’s a member of the NFA under license number 0325821. Therefore, this affirms that the broker is committed to offering transparent and excellent trading services to the U.S. clients.
U.S. traders using OANDA are not able to hedge trades and access leverage ratios of above 50:1. Furthermore, with the broker, traders benefit from unbiased trading conditions, maximum security of funds, and prompt address to issues.
Founded in 1971, TD Ameritrade boasts of years of experience in assisting customers to pursue their financial goals. It is headquartered in Omaha, Nebraska.
In September 2017, the brokerage firm reported that it had about 11 million funded client accounts. This points to its unwavering commitment to offer traders with a conducive environment for trading; otherwise, traders could not be flocking it.
With TD Ameritrade, you’ll benefit from professional customer support, intuitive trading tools, and access to a wide range of investment choices.
There are some offshore brokers which skirt U.S. regulations and accept US clients. Traders should be aware that using those brokers does not provide NFA or CFTC protection.
Non-U.S. Forex brokers providing services to U.S. residents
LQDFX.com has been serving clients around the world since 2015, and does offer service to the US traders. The company prides itself on using STP technology to assure that LQDFX has no conflict of interest with its client. All trades run through an aggregator that brings clients the best prices from the top-tier banks LQDFX uses as liquidity providers.
To maintain the security of customers’ funds, LDQFX keeps all their funds in segregated accounts. This means client funds are not mixed with company funds and cannot be used to pay back creditors.
LQDFX offers clients access to over 70 currency pairs as well as indexes and commodities. All can be traded using MT4.
As illustrated in this article, forex trading in the U.S. is different from the rest of the world. While the existence of the strong regulations is healthy to ensure the forex industry stays reliable and transparent, the strict guidelines have prevented most forex brokers from establishing their offices in the country and have driven many former US brokers overseas .
Therefore, if you want to trade with a U.S. regulated broker, you should carefully consider if the benefits are suited for your specific condition.
Special Note: Forex Peace Army does not recommend specific brokers. Forex brokers mentioned above are included because they are under US Financial Regulations.
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Many years ago, I was a trader on the Hong Kong Stock Exchange. I became so successful that my company moved me to their offices on Wall Street. The bull market was strong, but my trading gains always outperformed market averages, until that fateful day.
On October 28th, 1929, I tried to take some profits after Charles Whitney had propped up the prices of US Steel. I was trying to sell 10,000 shares, but my fat finger pressed an extra key twice. My sell order ended up being for 1,290,000 shares. Before I could tell anyone it was an error, everyone panicked and the whole market starting heading down. The next day was the biggest stock market crash ever. In early 1930, I was banned from trading for 85 years.
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