This article is meant to make a direct comparison between US forex brokers and offshore forex brokers, so one may understand the difference between both and be able to understand the main trading pros and cons.
American forex broker is a company located within the borders of the United States, which offers forex pairs to the US investing public for trading. These brokers are usually members of the National Futures Association (NFA) and have to be regulated by the Commodities and Futures Trading Commission (CFTC). US forex brokers operate under a very strict regulatory environment. Indeed, the environment is so strict that the US laws have been blamed for the shutdown of more than 90% of forex brokers that used to operate there before 2010. Examples of still fully functional US brokers include Oanda FX, IG (US branch), GAIN Capital LLC (Forex.com) and ATC Brokers.
The Forex.com brand is owned and operated by GAIN Capital Holdings Inc., a forex brokerage firm located in the US and other major locations around the world. The Forex.com brand is exclusive to the US market and is listed as a member of the National Futures Association (NFA # 0339826). Forex.com is the biggest US forex broker by market share. Forex.com has been in the US retail forex market for 18 years, providing its clients the opportunity to trade more than 80 forex pairs. Spreads on the EUR/USD are as low as 0.2 pips. Traders have the option of choosing their trades to be charged on using the following models: spreads only, spreads + commissions and the DMA model.
All clients of Forex.com are provided with 20 free custom indicators once they sign up for a demo or real account. Forex.com has an Active Trader program, which provides a rebate of 15% on trade charges for high volume traders. Traders on Forex.com can choose between the proprietary platform or the MT4; both of which have desktop, mobile and web-based versions. Leverage for forex majors is 1:50, while that for forex minors and other assets is 1:20.
Oanda is a US forex broker which commenced operations in 1996, and is licensed by the Commodities and Futures Trading Commission (CFTC). It is also a member of the National Futures Association, with membership number 0325821. Oanda offers its traders the opportunity to trade with the MT4. Being a true US broker, its leverage provision does not exceed 1:50 for forex majors. Oanda is an international brand that is located in other countries such as Canada, Australia and Europe.
However, a look at the product offerings of Oanda US will reveal major differences in what US forex traders get and what traders in other Oanda locations are offered. For instance, CFD and spot metal trading is not part of the asset listing on Oanda US. Spreads are also not as low as you would find elsewhere, with the EUR/USD being offered with a spread of 1.1pips. The FIFO rule also applies, which means that two opposing positions cannot be held on the same currency pair at the same time. However, some interesting tools are provided to US forex traders by Oanda. Traders get access to a forex order book and a forex open positions book, which provide a summary of open and recently opened positions by all clients on the Oanda platform for the previous trading day. This is a useful tool for traders who base their trades on sentiment analysis.
ATC Brokers is an ECN brokerage which is located in the Cayman Islands. It is being mentioned here because it represents an alternative destination for many US traders. ATC Brokers is regulated by the Cayman Islands Monetary Authority with license number 1448274. ATC Brokers offers its clients a modified version of the MT4 that can be used for ECN trading, known as the MT Pro. MT Pro offers a Depth of Market feature, which allows users to know where the institutional traders are placing their trades. Trading access to spot metals, FX and CFDs is provided from a single account, and an API for Maker and Taker order executions is provided. ATC Brokers also provides a Multi Account Management (MAM) trading model, suitable for those who trade multiple accounts. ATC Brokers goes beyond being a mere brokerage; it also offers several partnership models to interested individuals and companies. Leverage on FX and CFD assets is maintained at 1:200, except for silver which is traded at a leverage of 1:10. Spreads start at 0.3 pips for the EUR/USD, and is as low as 0.03 pips for XAG/USD. Gold is traded with a spread of 0.09 pips.
IG Markets (US)
After having made an exit from the US forex market for a number of years, IG Markets has made a re-entry into the retail segment of the US forex space. However, it does not offer services to residents of Ohio and Arizona. IG.com is licensed as a RFED and IB by the CFTC and is also a member of the National Futures Association (NFA number 0509630). IG Markets US has a EUR/USD spread of 0.8 pips, which is higher than that of Forex.com but lower than that of Oanda. In addition to the MT4, IG Markets US also offers a charting package which allows its clients to place orders directly from within the charts. Additional charges are applied as well: $12 per month for inactivity and $15 for bank wires. As with other US forex brokerages, a leverage cap of 1:50 is applied to trading on forex majors.
Though not an official classification, the name “offshore” is used to describe forex brokers that are typically located in areas such as the St.Vincent and Grenadines, British Virgin Islands, Cayman Islands, Seychelles, Mauritius and the island nation of Vanuatu. The hallmark of these offshore brokers is that they typically function in a regulatory environment that is regarded by industry standards to be more lenient than those of the US, UK or EU. The easier barrier of entry for brokerage business and forex trading has made these locations alternative destinations for new brokers and traders alike. Examples of well-known offshore brokers accepting US clients include LMFX, LQDFX, TradersWay and FxGlory.
LMFX is a high leverage broker that operates from St.Vincent and Grenadines. The company offers its clients a maximum leverage of 1:1000, which can be used to trade forex and CFDs using 7 different versions of the MT4 trading platforms. LMFX offers a 100% deposit bonus as well as a 15% recovery bonus, and clients’ funds are also segregated. The educational suite on LMFX is quite ok for beginners, and features video tutorials for easy assimilation. Traders with LMFX also get access to an economic calendar and daily market analyses. A variety of funding methods which all come with a minimum deposit of $50, are found here. E-wallets (Skrill, Fasapay, Vload and Neteller) as well as credit/debit cards from VISA and MasterCard can be used for deposits and withdrawals. Bank wire transfers can only be done when the minimum transaction amount of $250 is met. Transactions can also be conducted in Euros. All trading can be done using any of three account types: Premium, Fixed and Zero accounts, with the Zero Account featuring the zero-spread feature with very low commissions, making this account type suitable for high-volume trading and scalping.
LQDFX is an STP broker that offers spreads that are low as 0.1 pips on the EUR/USD. Based in the Marshall Islands and offering the MT4 platform exclusively, LQDFX provides five different account types to its traders. Account opening starts from $20, which is the minimum deposit for the Micro Account. The Gold account from LQDFX is a trading account that is exclusively designed for trading spot metals, indices, FX and commodities. Spreads start from 0.7 pips. There is also the ECN account type, which offers a typical spread of 0.1pips, a commission of $3.50 per Standard Lot and a leverage of 1:300. The VIP account is for those who can afford at least $25,000 minimum deposit, and who can trade with lower leverage levels that are capped at 1:100. Leverage on LQDFX is also set in such a manner that the lowest leverages are used by those with higher capital at their disposal. Leverage range is between 1:100 (VIP account holders) and 1:500 (Micro Account holders), with the other account types operating with a leverage of 1:300. Perhaps the strongest point for LQDFX is its trader educational suite, which is quite comprehensive and suitable for use by beginners and intermediate level traders.
Tradersway is a hybrid forex brokerage which offers several ECN platforms and a leverage cap of 1:1000. However, its MT4.CRYPTO account type, which is exclusively or cryptocurrency CFD trading, has a restricted leverage of 1:2. ECN trading conditions (variable spreads which start from 0 pips and direct pricing from the interbank market) are provided on the MT4.ECN and MT5.ECN accounts. These accounts come with a leverage cap of 1:1000. Hedging is allowed on Tradersway and account opening balance starts at $10. Tradersway has followed the examples set by other new brokerages in offering a wide variety of cryptocurrency funding options, which can be used side by side with the regular fiat options (bank wires, e-wallets and credit cards). Ethereum, Bitcoin, Litecoin and Ripple are the crypto funding methods of choice.
FXGlory is a 24/7 forex and CFD broker that offers a lot of interesting features. Apart from a high leverage cap of 1:3000, FXGlory also provides micro-lot trading and a VPS service to its funded live account holders for free. Traders get a 50% bonus on first deposits and have access to various funding methods including PayPal. The company operates a sliding leverage scale which sees leverage reducing from 1:3000 to 1:100 as capital increases from $1 to above $30,000. Operating from St.Vincent and Grenadines, FXGlory remains unregulated after 8 years of operations.
There are key differences between US forex brokers and offshore forex brokers. These differences affect the way forex traders do business in these jurisdictions.
US: Regulation of forex trading as well as forex brokerage business in the United States is the responsibility of the Commodities and Futures Trading Commission (CFTC). This agency has sweeping powers: enforcement using steep fines, heavy financial penalties and even outright banishment from the US market are commonplace.
Offshore: Depending on the location, offshore brokers are also regulated, but not as tightly as in the US. Some offshore regulators include the International Financial Services Commission (IFSC) which operates in Belize, Vanuatu Financial Services Commission (VFSC) and Cayman Islands Monetary Authority (CIMA).
US: The Commodities and Futures Trading Commission (CFTC) has mandated a leverage cap of 1:50 for forex majors and 1:20 for forex minors and forex options. These leverage caps are backed by the Dodd-Frank Act, a US law passed in 2010 that distinguished retail traders and classified them as “unsophisticated investors” who needed to be protected from leverage abuse.
Offshore: Most offshore brokers provide generous leverage that is sometimes as high as 1:2000. Leverage provided to traders is usually in a spectrum that ranges from 1:25 to 1:500, 1:1000 or 1:2000. Traders are expected to choose from the provided leverages in trading their preferred currency pairs.
US: As a result of the leverage caps imposed on retail forex trading, US forex brokers require traders to deposit at least around $50-100 as account opening balance.
Offshore: Minimum account opening requirements are not as stringent as in the United States, and traders can still open forex accounts with as little as $10 on some offshore platforms.
US forex brokers attend to US citizens and US permanent residents only.
Offshore brokers take on clients almost from all over the world.
US: In addition to trading currencies, other assets traded on the platform of a US forex brokerage must be exchange listed i.e. must be listed on the US markets. This effectively means that CFD trading by retail investors is banned in the US.
Offshore: Brokers allow traders unrestricted access to trade CFD assets on their platforms without restrictions.
US: All profits are subjected to capital gains tax. All traders opening forex accounts with US forex brokers are strictly required to fill a W-9 form that discloses their tax resident status to be the United States.
Offshore: Many brokerages are located in jurisdictions which are tax-free havens, or in areas where the tax requirements do not require international traders to declare tax status. It's also a common practice for traders to deposit and withdraw funds with use of cryptocurrency (e.g. Bitcoin). And, as you may know, blockchain transactions are highly anonymous.
The US is classified as a Level A forex jurisdiction, along with Japan. These are jurisdictions where brokers are expected to come up with high paid up capital in order to be approved for an operating license.
Majority of offshore brokerages are classified as Level D and Level E forex jurisdictions. Licensing is required, but requirements are not as stringent as for Level A jurisdictions. Licensing is required in British Virgin Islands, Latvia, Estonia and Vanuatu, but not so in Seychelles and St. Vincent & Grenadines. However, not obtaining a license will severely limit the ability of the forex brokerage to open a bank account with which clients can move funds into and out of the brokerage accounts. Reporting requirements are low.
US: Very high. Brokers are expected to have at least $20 million in operational capital, clients funds excluded. Reporting requirements are extremely strict and non-compliance can be a death knell for brokers as fines and penalties are very heavy.
Offshore: Quite low. With just under $200,000, licensing and other setup costs can be defrayed.
Now that the differences between US forex brokers and offshore forex brokers have been established, the information will not mean much to you as a forex trader unless you know how these points affect you.
As a consumer, you get a lot of protection when using regulated brokers. The CFTC has been very strong on consumer protection, but usually there have been repeated complaints by consumers of forex products about broker misconduct. Regulators of offshore brokers have also been known to offer some degree of consumer protection, but are generally more lenient than the US regulator. The IFSC also offers forex traders an investor compensation fund, so that they get financial compensation when broker malfeasance is proven.
Leverage caps in the US forex market mean that it is more expensive to trade forex in the United States than in offshore locations. This is as a result of the increased margin requirements for trades. This has great implications on forex traders. Firstly, it means that US forex traders are unable to use small accounts to effect a transition from demo to real money trading. Secondly, position sizing on trades will also be affected if the trader is to stick to acceptable risk management standards.
When trading forex with a US forex broker, you will be required to come up with a margin from 2% for forex majors, and from 5% for forex minors. A Standard Lot trade on the EURCAD will cost $100,000. 5% margin on this amount will mean that the trader will require a margin of $5,000 for a standard lot trade. Any US forex trader who intends to trade with the minimum capital of $25,000 and still maintain the risk exposure rule of 3%, will only be able to trade a maximum of 0.25 lots in total at any given time. In contrast, a forex trader with an offshore forex broker can use leverage of up to 1:2000. Assuming such a trader was to use 1:500 (i.e. 0.2% margin) as leverage, such a trader can comfortably trade up to 3 standard lots at a time with the same capital of $25,000, since total margin requirement that is within the 3% risk exposure rule is only $750.
The remarkable difference in margin requirements, leverage and position sizing ability while sticking to risk management principles, is what makes offshore brokers very attractive to forex traders around the world. Indeed, the US forex market has lost a lot of market share to offshore brokers on account of this point.
CFTC rules restrict US forex brokers to dealing with just US clients. Conversely, offshore brokers are not given a free reign to market their products to US forex clients. It is a case of “Americans only” when it comes to US forex brokers, in what many consider as protectionist policies taken a bit too far. In contrast, offshore forex brokers usually take on clients from any part of the world and do not discriminate.
CFD trading is banned in the US, so you will not see any CFD products or assets listed for trading on US forex broker platforms. Offshore brokers offer CFDs, so if you love to trade CFDs on stocks, indices, metals and other commodities, you will be restricted to trading with offshore forex brokers.