United States: should we copy its Trading rules?
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In the United States, there are a multitude of trading rules designed to protect individual clients from financial products considered to be at risk. These rules are much stricter than in Europe, although the AMF and the FCA are often cited as references in Europe in terms of client protection. Regulation in the United States has strengthened considerably since the 2008 financial crisis.
In the United States, customer protection is no laughing matter. The NFA (National Futures Association) and the CFTC (Commodity Futures Trading Commission) seek every year to keep private traders away from the most dangerous financial products. These authorities do not prohibit access to the financial markets but they do provide strong supervision to prevent the client from being fleeced. Here are the main trading rules in force in the United States:
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- Access to binary options prohibited: It should be noted that binary options were created in the United States and yet a law stipulates that they can only be traded on an electronic exchange (organized market). Binary options on Forex are strictly forbidden, it is only possible to trade on indices and stocks.
In Europe, all binary options are traded on the OTC market.
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Many individuals (especially novice traders) have a negative view of these restrictions. However, this is all about protecting investors and reducing their exposure to various market risks. By applying these trading rules in Europe, the amount of losses and the number of losing traders would be much lower.
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The abusive use of leverage always leads to the total loss of capital. The more you use it, the better your chances of losing. Numerous studies have been carried out and in particular a very relevant one carried out by the broker FXCM on all its clients: study on Forex.
Even for Forex traders who are winners, the more leverage they use the lower their performance. The most profitable traders use a leverage of less than 5. Leverage is a poison for individuals and limiting access to it is therefore a way to reduce the amount of losses and the number of losing traders (to the displeasure of all new traders who take Forex for a casino).
In the United States, the percentage of losing traders is lower than the ratios found in Europe (where there is no limit on leverage). See: The real Forex/CFD statistics.
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In addition, there are many binary option scams. Some brokers change their trading conditions to make the few winning traders lose, others leave with customers' money, and others block you from withdrawing money. To attract the client, a lot of account opening bonuses are offered by binary options brokers. That said, not all binary options brokers are crooks, some are authorised to exercise in Europe thanks to the MiFID directive (see: MiFID regulated brokers: a pledge of confidence?).
The United States understood that these products were dangerous for the individual. The decision to ban them or at least to limit their access under certain conditions is a very good thing. If such a measure were applied in Europe, it would have enabled many individuals not to lose their savings.
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If such a measure were applied in Europe, it would limit the number of scams.
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However, CFDs remain very good products. They offer many advantages (see: Equity Trading: CFD or cash?) but the problem remains the accessible leverage. Banning CFDs is a radical solution that has been chosen in the United States but it is not necessarily the best. The best solution in my view would be to prohibit (or severely limit) leverage on CFDs.
The AMF wants to make itself clear with its anti-Forex/CFD campaign (see - the AMF takes action) but it takes no real measure to limit individuals’ losses as is the case in the United States. They say it's not good but on the other hand they allow all dangerous services for traders. Long live the regulatory authorities!
However, there is one flaw in the application of these trading rules. This pushes traders towards organized markets (binary options and CFD bans). While these markets offer better protection to customers, they are also more expensive (rates for transactions above the OTC market). On the other hand, for Forex, stricter trading rules (limiting leverage) seems to make sense and has no flaws.
But apparently, customer protection is not a priority in Europe.
The United States has some of the strictest trading rules in the world
In the United States, customer protection is no laughing matter. The NFA (National Futures Association) and the CFTC (Commodity Futures Trading Commission) seek every year to keep private traders away from the most dangerous financial products. These authorities do not prohibit access to the financial markets but they do provide strong supervision to prevent the client from being fleeced. Here are the main trading rules in force in the United States:
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Leverage limited to 1:50 on Forex
: This trading rule was applied in the United States in 2010 for all residents / citizens in the United States. For the most exotic Forex pairs of leverage is limited to 1:20. Initially, the CFTC even wanted to limit leverage to 1:10 but brokers and financial institutions lobbied to raise the cap.- Access to binary options prohibited: It should be noted that binary options were created in the United States and yet a law stipulates that they can only be traded on an electronic exchange (organized market). Binary options on Forex are strictly forbidden, it is only possible to trade on indices and stocks.
In Europe, all binary options are traded on the OTC market.
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CFDs prohibited
: Residents/citizens in the United States do not have access to CFDs, which are considered a risky product. Effectively, these products are traded on the OTC market. The United States wants to limit access to the OTC market to individuals as much as possible. They consider that equities and indices should only be accessible on organised markets.-
Minimum share capital for brokers
: A broker who wants to be granted a license to operate in the United States must have a share capital of at least 20 million dollars. This prevents small brokers with little financial strength from attracting individual investors.Are these trading rules good for the individual?
Many individuals (especially novice traders) have a negative view of these restrictions. However, this is all about protecting investors and reducing their exposure to various market risks. By applying these trading rules in Europe, the amount of losses and the number of losing traders would be much lower.
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Leverage on Forex
: leverage is the principle cause for a lot of razed trading accounts. Novice traders believe they can make a fortune on Forex by using the maximum leverage offered to them. In Europe, leverage can go up to 1:1000. This is nonsense. For many brokers, it is a sales argument to attract new customers (see: Brokers: the race to leverage).The abusive use of leverage always leads to the total loss of capital. The more you use it, the better your chances of losing. Numerous studies have been carried out and in particular a very relevant one carried out by the broker FXCM on all its clients: study on Forex.
Even for Forex traders who are winners, the more leverage they use the lower their performance. The most profitable traders use a leverage of less than 5. Leverage is a poison for individuals and limiting access to it is therefore a way to reduce the amount of losses and the number of losing traders (to the displeasure of all new traders who take Forex for a casino).
In the United States, the percentage of losing traders is lower than the ratios found in Europe (where there is no limit on leverage). See: The real Forex/CFD statistics.
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Binary options
: On binary options, the losing trader ratio is almost 100%. It is one of the worst financial instruments in the world along with warrants. In Europe, however, binary options are a real hit and binary options brokers are legion. Novice traders often do not apply any risk management and open positions without any analysis or strategy. Binary options are comparable to betting on sports (for a long time the AMF considered binary options to be gambling - see: Regulation of binary options brokers).In addition, there are many binary option scams. Some brokers change their trading conditions to make the few winning traders lose, others leave with customers' money, and others block you from withdrawing money. To attract the client, a lot of account opening bonuses are offered by binary options brokers. That said, not all binary options brokers are crooks, some are authorised to exercise in Europe thanks to the MiFID directive (see: MiFID regulated brokers: a pledge of confidence?).
The United States understood that these products were dangerous for the individual. The decision to ban them or at least to limit their access under certain conditions is a very good thing. If such a measure were applied in Europe, it would have enabled many individuals not to lose their savings.
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Minimum share capital
: This measure makes it possible to make a selection depending on the broker’s offer. Only brokers with a certain financial solidity can exercise their activity. This considerably reduces the number of small brokers, which are often harmful to individuals (increased risks). The disputes that one finds on the forums are very often with small brokers.If such a measure were applied in Europe, it would limit the number of scams.
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CFDs prohibited
: CFDs are very flexible products and are very popular with individuals in Europe. However, these products are often the cause of heavy losses. There are more losing traders with CFDs than with Forex. CFDs are backed by products that are much more volatile than Forex (stocks and indices). If in addition to that, you offer leverage almost identical to Forex, it is normal that the losses are higher with CFDs.However, CFDs remain very good products. They offer many advantages (see: Equity Trading: CFD or cash?) but the problem remains the accessible leverage. Banning CFDs is a radical solution that has been chosen in the United States but it is not necessarily the best. The best solution in my view would be to prohibit (or severely limit) leverage on CFDs.
Conclusion
The AMF wants to make itself clear with its anti-Forex/CFD campaign (see - the AMF takes action) but it takes no real measure to limit individuals’ losses as is the case in the United States. They say it's not good but on the other hand they allow all dangerous services for traders. Long live the regulatory authorities!
However, there is one flaw in the application of these trading rules. This pushes traders towards organized markets (binary options and CFD bans). While these markets offer better protection to customers, they are also more expensive (rates for transactions above the OTC market). On the other hand, for Forex, stricter trading rules (limiting leverage) seems to make sense and has no flaws.
But apparently, customer protection is not a priority in Europe.
