The worldwide forex market is extremely liquid, with an enormous daily trading volume. Furthermore, the market is open for trading 24 hours a day, five days a week, which allows you to set your own trading schedule. Therefore, because of its advantages and conveniences, the forex market has attracted a huge number of investors from all over the world.
However, forex trading in the U.S. is not the same as in other countries. Although the forex market is decentralized, traders in the U.S. have more restrictions than those in off-shore countries. The forex trading environment in the U.S. is heavily regulated, and brokers have to adhere to strict guidelines.
Understanding the United States Forex Trading Environment
The United States forex trading industry is very different from the rest of the world. Primarily, providing forex brokerage services in the country is not as simple as offering the same services in other countries.
In the U.S., a forex trading customer is defined by the law as any person or entity whose value of net worth is less than $10 million. In itself, the U.S. law is intended to safeguard the interests of small investors.
Regulation of the U.S. forex trading industry was tightened in response to the worldwide financial crisis of 2007-2010. In 2010, the Dodd-Frank Act was signed into law to patch up business activities on Wall Street and safeguard consumers from exploitation. However, its passage resulted in the downfall of several U.S. forex brokerage firms.
In 2006, there were about 50 brokerage firms offering forex trading services to customers in the country. However, following the sweeping Dodd-Frank legislation, that number has reduced significantly. The law also forbids forex brokers from other countries from recruiting U.S. customers.
Since the implementation of the Dodd-Frank Act, the U.S. market share in the forex industry has reduced considerably. In 2009, the country’s share of the worldwide retail forex trading volume was 6%. In 2016, that share had decreased by half to 3%.
The U.S. government has stipulated strict regulatory requirements that brokers (including introducing brokers) interested in offering services to customers must adhere to. Before allowing U.S. citizens, the brokers must be registered with the NFA (National Futures Association) and regulated by the CFTC (Commodity Futures Trading Commission).
The NFA and the CFTC define the regulatory framework that upholds transparency, honesty, and protection of different market participants. Together, the two agencies ensure the U.S. forex industry is as fraud-free and fair for all as possible.
The existence of much stricter rules in the U.S. has made the forex industry to thrive in places with more relaxed regulations around the world.
Role of the CFTC and NFA
Created in 1974, the CFTC is an independent U.S. government agency that is tasked with ensuring transparency and integrity in the financial markets by preventing risks such as fraudulent market activities, manipulation of market conditions, and financial malpractices.