It is a well-known fact that the currency market is open 24 hours a day, five days a week. This occurs because currencies are traded in numerous locations throughout the world. Even though the New York session has the greatest impact on currency rate movements, the number of US-based retail traders is quite small.
If you are from the United States, you may be perplexed by the large number of brokers who provide services all over the world but are not present in the United States. Even though the United States is the largest market for a variety of goods and services, private investors rarely engage in foreign exchange trading.
According to the Dodd-Frank Act, a forex broker who wants to function in the United States must be registered with both the CFTC and the NFA. This necessitates brokers putting up a significant amount of capital as collateral, as well as complying with time-consuming and costly reporting procedures. For example, the NFA and CFTC both charge a license fee of $20 million. As a result of the Dodd-Frank Act, numerous Forex brokers have opted to refuse US citizens and it is difficult to search for Forex brokers accepting US clients.
US Residents Can Trade Forex
Before we go any further, it's important to note that forex trading is not illegal in the United States. A trader from the United States can trade forex online just as effortlessly as someone from Europe or Australia. The primary distinction, though, is the number of brokers from which a trader can choose. There are a few reasons for the low number of FX brokers; let's look at each one below.
Regulations And Licenses
The regulatory climate for brokers operating in Europe is rather straightforward. After obtaining a license from one of the European authorities, a broker can readily accept traders from any EU country. In other words, a broker authorized by the UK Financial Conduct Authority can welcome traders from Germany, the Netherlands, Bulgaria, and other EU countries.
European licenses, on the other hand, do not operate in the United States. The NFA, or National Futures Association, regulates brokers who seek to bring traders from the United States on board. You might wonder why brokers with several licenses, such as CySEC, FCA, ASIC, and others, would not seek another one to offer services in the United States. The answer is straightforward: capital requirements. While a broker must have roughly $100,000 to $500,000 in locked cash to acquire one of the European licenses, the NFA wants a whopping $20 million in capital to function in the United States.
This sum solely represents a deposit required by a broker and does not include any legal fees related to getting licenses, hiring lawyers to be listed on the register, or hiring executives. To put it another way, operating in the US market is costly.
Even if some brokers make enough money to be able to afford it, $20 million is a significant sum to set up for only a license. The world's 15th largest broker would only make a profit of $10 million per year on average, thus dedicating a profit of two years to the privilege of working in one country is a very substantial investment.
Back in 2008, the financial regulation scenario was much different, and there were a few brokers who welcomed US clients. However, there are just about five US-friendly brokers nowadays.
You might be wondering why, if there are only a few brokers in the United States, more brokers aren't attempting to get into the industry. There are approximately 300 million people in the United States, so it's difficult to assume that no additional brokers could afford NFA certification. The truth is that, while more brokers may be able to deposit $20 million to operate, not every broker will be lucrative.
As you may be aware, FX brokers profit from the volume exchanged; therefore, the greater the trader's activity, the greater the broker's profit. However, unlike in Europe, where a trader can get 500:1 leverage on majors and 20:1 leverage on minors, in the United States, a trader can only get 50:1 leverage on majors and 20:1 leverage on minors. This means that a broker can expect to make 10 times less profit in the United States than in Europe, assuming the two regions have the same number of traders and deposits.
Furthermore, and this goes without saying, wages in the United States are generally rather high, so the entire process of supporting US-based activities is not cheap.
Even though it is difficult for some brokers to begin operating lawfully in the United States and thereafter to become lucrative, US regulators have historically been considered as a barrier.
The NFA has slapped hefty fines on several brokers for misbehaviour. While the causes for the sanctions may have a minor impact, the fines are usually substantial, ranging from $200,000 to $2 million.
In other words, a broker can work hard for a year and then have his or her profits (or even more) taken away by the regulation because of wrongdoing.
US traders are also far more prone to stock trading, which is why they frequently prefer to buy stocks over currencies. Trading stocks is, in most situations, more expensive for traders (or more rewarding for brokers) than trading forex. Therefore, US-based brokers must compete not just against one another, but also with stockbrokers for a piece of the pie by making people aware of online forex trading.
The severely regulated environment, which requires brokers to deposit a significant amount of money while also limiting leverage, is undoubtedly to blame for the limited number of FX brokers in the United States.
As a result, a few unregulated brokers are already selling their services in the United States, as they can better address the needs of traders while incurring minimum legal and operating costs. On the other hand, unregulated brokers that welcome US traders should never be considered.