How to trade Forex in the US
If you reside in the US, you have probably had trouble finding a Forex broker to enable you trade in the Forex market, even though there are so many brokers around the world. This is because of stricter regulations in the US compared to other countries which prevent more brokers from operating there. Keep in mind that Forex trading is not restricted in the US, it’s just more heavily regulated.
Why aren’t there many Forex brokers in the US?
After the 2007 - 2008 financial crisis, financial regulators felt that it was important to impose stricter regulations, and these were outlined in the Dodd-Frank agreement signed in 2010. As a result of the new regulations, many brokers left the US market due to what they felt would be punitive regulations. Some of the regulations governed:
Licencing and capital requirements
To operate and sign up clients from the US, Forex brokers need to be registered by the National Futures Association (NFA) which has stricter rules. For example, they require a minimum capital of $20 million before licensing a broker to operate. This capital requirement is the amount of money kept locked by the broker and it is supposed to cover any losses in case of tumultuous market conditions.
Compared to the NFA’s requirements, brokers in Europe require between $100,000 and $500,000 in capital to get registered, which is a huge bargain.
Forex brokers don’t make as much money as you may imagine, especially the ‘young’ brokerages. For example, Gain Capital Holdings, the parent company to Forex.com, reported an income of $35 million for the entire year 2016. Given that this is one of the largest Forex brokers in the world with over 200,000 clients, you can now see why a $20 million capital requirement can be a challenge to most retail Forex brokers.
The retail Forex market is supported by leverage, which allows traders to control a much larger amount of assets. Today, there are Forex brokers who offer up to 1000:1 leverage which means that a trader could trade a standard lot with as little as $100. Of course, high leverage carries a lot of risk, but it is the main reason the Forex market is still growing.
At the moment, maximum leverage allowed by the NFA is 50:1, which is not very attractive to individual traders. What you probably don’t know is that the situation could have even been worse. Back in 2010, the CFTC wanted to limit leverage to 10:1, but US-based Forex brokers like FXCM and others fought to retain the already reduced 50:1 ratio.
With such limited leverage, most clients would be discouraged against trading with US-regulated brokers, and many have chosen not to pursue the American industry. Then there’s the lack of popularity of Forex trading in the US market, with many people focusing on stocks, mutual funds and ETFS. Basically, the US market may not be profitable for Forex brokers to pursue.
Where do you find brokers accepting US clients?
The NFA’s regulations mean that Forex brokers cannot solicit or sign up traders residing in the US before they are licensed. As we saw before, there are a few reasons why many brokers are not licensed by the NFA. Nevertheless, some Forex brokers are, and any US resident can sign up with them and participate in the Forex market. Some Forex brokers with headquarters in the US include:
- TD Ameritrade
- TradeKing Forex
- Interactive Brokers
Besides these, there are others based outside the US such as:
- FX Choice
- Trader’s Way
- FinPro Trading
When dealing with brokers outside the US, you should always be careful because most of them are not regulated by the NFA. This means that your investment may be at risk. To confirm a broker’s regulation, check their ‘About Us’ page for a licensing code. Then find the regulator’s website and check to confirm.
For US brokers, the CFTC also issues a ‘red list’ of Forex and binary options brokers who have been known to defraud their clients.
Also remember that any gains you make while residing in the US from Forex trading is subject to taxation. Gains from Forex trading are regarded as ordinary income, and you will have to pay taxes for it according to your tax bracket. To reduce taxes on returns from Forex, you can treat the profits as capital gains rather than ordinary gains, which would significantly reduce the amount of tax you would have to pay. Still, this is unlike non-US regulations which do not impose taxes on earnings from Forex trading.
Written by topbrokers.com