Forex trading continues to flourish and there’s no sign of it stopping. We believe that trading currencies online will stay popular for as long as there are interested traders and investors out there. We can thank Forex brokers for making every trader’s life so much easier by providing easy-to-use trading platforms and favorable trading conditions.
While Forex trading is quite easy to do in European countries and Asian countries, especially in the ASEAN region, it’s a different story in the USA. As you know by now, the U.S. imposes regulations and standards which are quite hard to meet. This is why it’s become hard for the best Forex brokers to penetrate the U.S. market
With a population of about 329.45 million, the U.S. market is really a huge market, and it only makes sense to do business in this country. But as we’ve said, brokers must adhere to rigorous rules.
To understand why Forex trading will never be easy for Forex brokers and even traders in the USA, we’ll give you some points.
In order to provide trading services to clients residing in Europe, a Forex broker has to be regulated by the Financial Conduct Authority. An FCA-regulated broker can serve clients in European countries like the UK, Bulgaria, Germany and France.
Now when it comes to the U.S., licenses obtained from Europe simply don’t work. You might have encountered brokers which are regulated by several agencies like the UK’s FCA, Australia’s ASIC, and Cyprus’s CySec – so why not obtain a license from the U.S.? The answer lies in capital requirement. As you know by now, Forex entities that intend to cater to U.S. clients need to be regulated by the National Futures Association and must be registered with the Commodity Futures Trading Commission. While European licenses require brokers $100,000-$500,000 for locked capital, the NFA requires much higher with $20 million.
That’s only the required locked capital. The amount still doesn’t include the fees needed to obtain licenses. Simply put, it’s really expensive to penetrate the U.S. market. For smaller brokers, this isn’t simply not ideal.
Leverage is such an important thing in trading Forex. Thanks to it, traders with small capital are able to trade in higher volumes. Forex brokers offer a leverage as high as 1:1000. This means with a starting capital of $100, they can control as much as $100,000 (1000 x 100).
But the National Futures Association only allows brokers to offer a leverage up to 1:50. This is to protect U.S. traders from incurring bigger losses. Leverage, as we all know, is a double-edged sword. When used improperly, it can cost traders a lot of money.
For Forex brokers, a lower leverage is also bad news. If traders were only to trade in lower volumes, brokers will also earn lower profits. This could mean they might find it hard to finance their operation in the US.
The restriction in leverage in the US makes Forex trading less lucrative given that traders have no sufficient capital. This is the reason why US investors opt to invest in other financial markets like stocks, real estate, and mutual funds.
Restriction in Trading Strategies
While most Forex brokers regulated in Europe and Australia don’t have any restrictions in Forex trading strategies traders may use, U.S. brokers have some restrictions. The U.S. regulators don’t allow hedging. Hedging is when a trader opens a new position in the opposite direction of their losing trades. Such strategy, according to U.S. regulators, works against traders as they pay double spread fees, which incurs them more trading costs.
The U.S. has stricter guidelines when it comes to trading Forex. For Forex companies, it could be a challenge to penetrate the U.S. market as the NFA and CFTC require a bigger locked capital. For traders, the lower leverage may not seem ideal as it will limit their trading capacity. Plus, there’s a restriction in trading strategies allowed. These are only a few of the reasons why Forex trading will never be easy in the USA.