Ep 148: How to Trade in a Foreign Account or as an International Trader
It is a common known fact that the Forex market trading goes on 24 hours a day, 5 days a week. This happens due to the fact that there are multiple centers all over the world where the currencies are traded.
Yet, even though the New York session tends to have the most significant impact on currency rate fluctuations, the amount of US based retail traders tends to be quite small.
If you are from the US you can be quite puzzled by the amount of brokers that are offering the services throughout the world, but are still not present in the States.
Even though the US is the major market for various goods and services, for some reason FX trading for individual investors is not so common.
US residents can trade Forex
Before we move on any further, it is vital to state that Forex trading in the US is not prohibited. A trader from the US can trade FX online as easily as a person living in Europe or Australia. However, the main difference lays in the variety of brokers a trader can choose from.
There are a few reasons why the amount of FX brokers is very low, let's examine each of them below.
Licenses and Regulations
When it comes to the brokers that operate in Europe, the regulatory environment is rather simple.
Once a broker has obtained a license from one of the European regulators, it can easily accept traders from all EU countries. In other words, a UK Financial Conduct Authority regulated broker can accept traders from Germany, the Netherlands, Bulgaria and other EU member states.
However, when it comes to the US, European licenses simply do not work.
A broker that wants to have traders onboard from the US has to be regulated by the NFA, National Futures Association. At this point you may ask, there are brokers that have multiple licenses, like CySEC, FCA, ASIC and more, why would they not get another one to provide services in the US?
The reason for this is quite simple - capital requirements. While a broker has to have around $100,000 - $500,000 of locked capital to obtain one of the European licenses, NFA requires quite an enormous amount of capital to be able to operate in the US - 20 million dollars.
This amount of money only corresponds to a deposit that a broker has to make and does not include any legal fees associated with obtaining the licenses, employment of lawyers to be placed on the register and executives.
In other words, the US market is an expensive market to operate on.
Even though some brokers make profit enough to afford it, 20 million dollars is quite a large sum to allocate just for a license.
On average, the world's 15th largest broker would hardly earn 10 million USD in profit annually, hence allocating a profit of 2 years for the privilege to work in one country is an extremely serious investment.
The situation with capital requirements was quite different back in 2008 and at that time there were quite a few brokers that accepted US clients.
However, today the amount of US friendly brokers is just less than five.
Now you may wonder, if there are only a few brokers in the US, why are more brokers not trying to penetrate the market? There are over 300 million people living in the US and it is quite hard to believe that there are no more brokers that could actually afford the NFA licensing. Well, the truth is that, although more brokers could deposit 20 million to operate, not every broker will find it profitable.
As you know, FX brokers earn from the volume traded, hence the higher the trader's volume is, the more profit a broker makes.
However, unlike European countries where a trader has access to the leverage of 500:1, in the US it is only possible to supply 50:1 leverage on majors and 20:1 leverage on minors.
This means that a broker can expect to receive some 10 times smaller profit in the US than in Europe, provided that it has the same amount of traders with the same amount of deposits in the two regions.
Furthermore, yet needless to say, wages in the US tend to be quite high, so the whole process of financing the US-based operations is not cheap at all.
Even though it is already quite hard for some brokers to start operating legally in the US and then to become profitable, historically US authorities have also been seen as a hindrance.
Quite a few brokers have been heavily fined by the NFA for malpractice.
While the impact of the reasons behind the fines could be quite insignificant, the fines tend to be heavy: ranging from $200,000 to $2 million.
In other words, a broker may spend a year working hard, and by the end of the year its profits (or even more) can be simply taken by the regulator as a result of certain misconduct.
US traders have also been much more inclined to stock trading, this is why they often choose to acquire shares over currencies.
In most cases, trading stocks is actually more expensive for traders (or more profitable for brokers) than Forex. This is why US based brokers not only have to compete against each other, but also in order to take a slice of the stock brokers' pie by increasing the awareness about online currency trading.
The limited amount of FX brokers in the US is certainly caused by the heavily regulated environment that requires brokers to deposit a substantial amount of funds and, at the same time, decreases brokers' profitability by limiting leverage.
This also results in a few unregulated brokers offering their services in the US as they can better meet the needs of the traders, while their legal and operational costs are minimal.
However, unregulated brokers that accept US traders should never be your choice.