Considering that many of the world’s premier trading and investing options are US-based, it can seem strange that it is so hard to find an accessible, US-based Forex trader for many would-be investors.
Because of this, many US citizens seeking to invest in Forex markets choose Forex brokers outside the USA. Doing this has both benefits and risks. Understanding them is key to ensuring you find the best brokerage for you.
Dodd-Frank and Forex: Why US Brokerages are Hard to Find
One of the reasons that it is so hard to find a US-based Forex broker that is easily accessible for small to medium investors is the 2010 Dodd-Frank Act. Enacted following the 2008 financial crash in order to prevent recurrences of the catastrophe, this act puts serious restrictions on American Forex brokers and has led to a general migration of brokerages to EU and non-EU countries.
As well as limiting trade volume (which limits brokers’ earnings), the Dodd-Frank act requires that brokerages have a certain amount of liquidity and restricts leverage levels. All of this has made the US market less attractive to Forex brokerages.
Of course, it has also made the process of Forex speculation safer for those who use US-based brokers. As always, there are pros and cons to both local and international brokerage options.
The Pros and Cons of an American Forex Broker
Choosing a US-based Forex broker is often considered a low-risk option. While it is true that US-based brokers are more regulated, there is still risk associated with any Forex trading. Here are the pros and cons associated with seeking a US-based Forex broker:
- Liquidity requirements increase stability for US regulatory compliant brokerages.
- Restricted leverage means limited potential losses.
- Strict regulatory requirements offer consumer security.
- Strategy restrictions mean an (arguably) more ethical trading process.
- Liquidity requirements and license fees make US-based brokers scarce and often picky about clients (they can be inaccessible for low investment traders).
- Strategy restrictions limit trading options and arguably reduce flexibility.
- Restricted leverage and trading volumes can limit client options and profits, too.
The Benefits and Limitations of an International Brokerage
Because of the strict regulations and restrictions faced in the USA, many brokerages have moved away from the US market and many Americans have started to use non-US brokerages. There are some benefits to doing this, but also some risks to consider.
- Fewer restrictions on trading styles allow for a more personalized and versatile approach.
- Lower trading volume limitations (or a total lack of limitations) make it easier to undertake fast-paced trading.
- Higher leverage capabilities offer the possibility of enlarged profits.
- Lower liquidity requirements make room for independent and innovative brokers and makes Forex trading accessible for small to medium investors.
- Low level of regulatory control increases risk (you could more easily fall afoul of shady brokerages).
- Lack of leverage limitations also increases the chance of oversized losses.
- Wider array of trading styles can be confusing for beginners.