Behind every good trader, there is a good broker who provides reliable trading service. In regards to the notion, how are US forex brokers compared to the offshore ones?
In this new era of globalization, people are getting a lot more flexibility in doing business transactions. Let's take the choice of forex brokers for an example. We get to enjoy a wider range of options offered by the international forex brokers available. But, does a broker from other countries provide better services than a broker in a certain area?
Well, let's check them out as we delve deeper into the comparison between trading packages offered by US forex brokers and their offshore counterparts.
Here's the comparison summary between US and offshore forex brokers that you must know:
| Aspects | US | Offshore |
| 💼Regulation | CFTC, NFA | IFSC, VFSC, CIMA, etc. |
| ⚖Leverage caps | 1:50, 1:20 | 1:25, 1:500, 1:1000, 1:2000 |
| 💰Minimum deposit | Approximately $50 or above | Approximately $10 or less. There are several brokers that allow a $1 minimum deposit. |
| 💲Asset Index | CFD trading is restricted | Allow CFD trading |
| 💸Cost to start a brokerage | From $20 million | Less than $200,000 |
Hopefully, by the end of this article, you will understand the differences mentioned above and be able to choose the one that better suits all your trading needs.
US Forex Brokers
Let's first start by defining US forex brokers. In this article, every company that is located within the borders of the United States and actively offers forex pairs for trading will be categorized as US forex brokers.
The main trait owned by these brokers is that they usually have membership in the National Futures Association (NFA). The other characteristic is that they are usually regulated by the Commodities and Futures Trading Commission (CFTC).
As you might have guessed, having these two characteristics means all US forex brokers operate under a very strict regulatory environment. People even say that the environment is so harsh nowadays, that it becomes the main reason for the shutdown for over 90% of forex brokers who used to operate there before 2010.
Some of the still operating and well-known US forex brokers are OANDA, IG, and Interactive Broker that we will review below.
OANDA
OANDA was first established in 1995 in America with the main activity of forex brokerage, having registered with a business license from the Commodities and Futures Trading Commission (CFTC) as well as ongoing valid membership in the National Futures Association.
OANDA offers its traders the simplicity to trade by integrating their system with MT4. And they are applying the FIFO rule on their trading system, which means that two opposing positions cannot be held on the same currency pair at the same time. You might realize that the spreads are not as low as you might find elsewhere. For instance, EUR/USD trading is being offered with a spread of 1.1 pips.
Nowadays, OANDA has become an international brand that you can find in other countries such as Canada, Australia, and Europe. Having originated from the US, OANDA limits its forex majors leverage up to 1:50.
However, the products offered by US-based OANDA include 68 forex pairs and 10 cryptocurrencies. Nevertheless, US-based OANDA doesn't provide any CFDs or other instruments except forex and crypto.
There is no minimum or maximum deposit limit. You may be charged a service fee by your bank and intermediary bank for transferring funds into your OANDA trading account.
However, the traders in the US do get some interesting tools they can tinker with. Traders in the US have access to a forex order book and forex open positions book. The options allow traders to get a summary of open and recently opened positions by all clients on the OANDA platform for the previous trading day. This kind of tool is essentially perfect for traders who base their trades on sentiment market analysis.
Traders looking for brokers with accurate precision, OANDA can be an option. That is because OANDA is a broker that provides quotes with 5-digit accuracy and active price movements that follow market developments. Order execution speed is also faster in this broker.
It provides benefits for novice traders, as they can trade with smaller volumes using the calculation system based on currency value, unlike other brokers adopting the lot system.
Founded in 1996, OANDA was built by Dr. Michael Stumm who is a lecturer in Computer Engineering at the University of Toronto, Canada, along with his colleague, Dr. Richard Olsen of The Olsen Ltd., which is one of the leading econometric research institutes. They have a head office in San Francisco, United States.
OANDA branch offices can be found everywhere. Some of these offices are located in the United Kingdom, Singapore, Japan, and Canada. With this number of offices spread, OANDA has increasingly attracted the attention of clients worldwide.
OANDA's company is registered under several well-known jurisdictions in financial trading. They are regulated by CFTC and NFA in the US, FCA in the UK, ASIC in Australia, and many others. Traders do not need to worry anymore about security when trading in OANDA. However, these advantages make trading rules at OANDA more stringent compared to other brokers.
For example, OANDA only allows maximum leverage of 1:20, because the rules in the US and Japan do not allow leverage above that. Besides, the registration procedure is more complex due to various additional requirements that are not submitted by other forex brokers. On top of that, hedging is not allowed in one trading account as the client must open an additional account to hedge.
Nevertheless, OANDA is known for being a leading broker with many advantages offered. OANDA faces increased market risk during periods of price volatility, such as economic and political news announcements. When market spreads increase or decrease, their pricing engine widens or narrows spreads accordingly. That way, traders can get the latest conditions from price movements in the market more quickly.
Prices move very fast in the market. Especially when news releases have a large impact on market volatility. This condition is often exploited by brokers to take advantage of clients with Requotes. However, traders do not need to worry about additional costs when trading with OANDA.
The company never withdraws Requotes so traders can get maximum profit. When traders are unavailable to monitor open positions, they can set take profit orders to lock in profits and Stop Loss orders to help protect against further losses.
As an experienced and well-known online forex broker, OANDA is committed to maintain an efficient trading environment that reduces latency and provid tools to help clients manage the degree of acceptable slippage.
With a fast & reliable trading platform by OANDA, clients' trades are executed in 0.012 seconds. This suits traders who choose brokers based on execution speed.
Because of this exceptional execution service, it is not surprising that OANDA won many awards, including the winner of the world's Best Retail FX Platform at the prestigious e-FX awards. The broker is also voted number 1 for Consistency of filling trades at quoted prices, Execution speed, and Reliability of platforms.
There is no minimum deposit or minimum balance required to open an OANDA account. Deposit and withdrawal can be done easily. OANDA provides a variety of payment method facilities, including Paypal, Wire Transfer, Credit Card, and Debit. Traders can adjust it to the region where they live.
OANDA provides more than 100 trading instruments, including 71 currency pairs, 16 indices, 8 commodities (Brent Crude Oil, Copper, Corn, Natural Gas, Soybeans, Sugar, etc.), 6 Bonds, and 23 Metals.
The fxTrade and MetaTrader platform are available at OANDA. These platforms can be used for Desktop and Mobile. Another plus is they have an OANDA Technical Analysis that exists in collaboration with a technical analysis provider called Autochartist.
With these platforms, clients can monitor price movements easier and automatically recognize patterns created on charts, as well as receive alerts when the awaited patterns appear. Access to this technology can be enjoyed free of charge.
In conclusion, OANDA is an ideal broker for traders in need of fast execution backed by many years of experience. The company is also a good alternative for those looking for a well-regulated broker with flexible trading and deposit conditions.
IG Markets
IG Markets (IG.com) is licensed by the Commodities and Futures Trading Commission (CFTC) as an RFED and IB. They also hold a valid membership in the National Futures Association with NFA number 0509630.
Previously, this forex broker has decided to make an exit from the US forex market for a couple of years. But then they decided to make a re-entry into the retail segment of the US forex space. However, they no longer offer services to residents of Ohio and Arizona.
Similar to other US forex brokerages, a leverage cap of 1:50 is applied to trading on 80+ forex majors. This forex broker offers quite competitive spread rates. For an instance, the EUR/USD currency pair gets 0.8 pips of spread, which higher than that of Forex.com but lower than OANDA.
IG Markets also offers a charting package. This package allows traders to place orders directly from within the charts. You can open an account in IG Markets with a minimum deposit of $250.
IG Markets is an online trading provider with decades of experience in the financial market. Founded in 1974, the world-leading company has gathered more than 178,000 clients worldwide with over 16,000 markets reached as of 2019. IG Markets is authorized and regulated by the Australian Securities and Investment Commission (ASIC). It is also important to note that being established in 1974 makes IG Markets one of the forefront online CFD brokers. Their service has expanded to 15 countries across five continents.
Aside from famous for its reliable experience, IG Markets is also known for its truly broad range of trading instruments. In fact, the broker has long been regarded as one of the most accomplished companies in offering the most trading assets to clients. The wide choice of instruments includes forex pairs, 26 indices, over 12,000 shares, hard and soft commodities, cryptocurrencies, as well as other markets such as bonds, rates, and options.
Forex trading in IG Markets is provided in two ways: CFD and DMA (Direct). Here are the conditions for each type of trading:
Forex CFD
- Minimum spread: 0.6 pips
- Commission: None
- Platforms: Web, mobile apps, MT4, ProRealTime, L2 Dealer, terminals and APIs
- Trading size: Contracts
- Demo account: Yes
Forex DMA
- Minimum spread: No details
- Commission: from $10 per $1 million traded
- Platforms: Web, mobiles apps, L2 Dealer, terminals, and APIs
- Trading size: Lots
- Demo account: No
Both ways of trading are available for all clients. However, DMA does not enable trading in MetaTrader 4. Clients are also not allowed to trade in a demo account for virtual trading. It is essentially a type of trading reserved for experienced traders with high necessity for the best pricing in the market, as DMA offers market depth from a range of exchanges (including full market depth from the LSE).
Trading platforms in IG Markets are accessible via web, mobile app, and desktop. They are offered with 2 main varieties: Core Platforms and Specialist Platforms. The core platform is meant for all types of trading with the add-ons of DMA, ProRealTime access, and Forex Direct. Meanwhile, Specialist Platforms consist of L2 Dealer, ProRealTime, and MetaTrader 4.
The first two platforms charge fees that include minimum $2000 balance and monthly fees for shares data and level 2 prices (for L2 Dealer), as well as platform fees amounting to $40 per month and monthly fee for shares data (for ProRealTime).
IG Markets does not require a minimum balance to open an account. It also provides a swap-free account that frees clients for any interest, rollover, or swap charges on overnight positions. Yet, All costs and charges are built into the spread. This account suits well with long-term traders who need to keep their positions open for days or even weeks.
For beginners, IG Markets builds an IG Academy that gives interactive education and online trading courses. This way, clients can get a grip on the financial markets with the essentials of trading provided in infographics, video explainers, and end-of-course quizzes. Even better, the IG Academy is already integrated into its mobile app so clients can always learn about financial markets in much more efficient ways.
In conclusion, IG Markets is a client-friendly broker with more than 40 years of experience to back up its credibility. Their efforts and commitments to provide the best varieties of trading platforms are proven in the unique Core and Specialist Platforms.
Traders with little experience can apply to Forex CFD account in either Core Platforms or MetaTrader 4, while professionals can achieve the best experience in the financial market with IG Market's DMA trading and L2 Dealer or ProRealTime platforms.
Interactive Broker
Interactive Broker is regulated by the US Securities and Exchange Commission and the CFTC. It is exclusive only to the US market and currently is the biggest forex broker in the US by market share.
Interactive Broker is owned and operated by GAIN Capital Holdings Inc. This firm specializes in the forex brokerage industry and is located in the US and other major locations around the world.
Since its inception, Interactive Broker has served the US retail forex market for more than 20 years. Currently, they can provide clients with the opportunity to trade with a wide option of more than 80 forex pairs. Traders can get up to 1:50 leverage for forex majors, and up to 1:20 leverage for forex minors and other assets.
Traders can easily access Interactive Broker either from its proprietary platform or even using the MT4; both of which has full optimization to all types of device such as desktop, mobile, and web-based. Upon initial sign up, every client of Interactive Broker is required to fund $100 for a minimum deposit.
Spreads on the EUR/USD are as low as 0.2 pips. Traders have the option to choose either spreads only spreads plus commissions, or the DMA model on trade charges. Even better, Interactive Broker also features an Active Trader program. This program works by providing a 15% rebate on trade charges for high-volume traders.
www.interactivebrokers.com
1:100
$10000
1977
Interactive Brokers is a direct market access broker that provides execution, clearance, settlement, and prime brokerage for customers. Since it was found 41 years ago by Thomas Peterffy, the company has grown internally to become one of the premier securities firms with over $7 billion in equity capital.
First acknowledged as a popular broker for advanced traders, Interactive Brokers launched a second tier of service called IBKR Lite for more casual investors in 2019.
The IBKR Lite provides services on over 125 market destinations worldwide and gives direct access (online) trade execution and clearing services, both to institutional and professional traders for a wide variety of traded products including stocks, options, futures, forex, fixed income, and funds worldwide. Interactive Brokers Group and its affiliates execute over 859,000 trades per day.
Headquartered in Greenwich, Connecticut, Interactive Brokers has over 1,400 employees in the USA, Switzerland, Canada, Hong Kong, UK, Australia, Hungary, Russia, Japan, India, China, and Estonia companies. IBKR is regulated by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Financial Conduct Authority (FCA), and is registered in the New York Stoch Exchange (NYSE).
Interactive Brokers offers a wide range of product-centered tools like the OptionTrader and Probability Lab for simplified single and complex multi-leg option trading; FXTrader for forex trading, Mutual Fund/ETF Replicator for helping traders find a lower cost on ETF alternatives, also fixed-income screeners for corporate and agency bonds. Overall, trading with Interactive Brokers would be provided with the most useful and updated tools to maximize trading and investing goals.
As a popular and regulated broker in the US, Interactive Brokers has won some awards. Recently, they were awarded by the Barrons as the 2019 Best Online Broker, which is categorized as the best broker for mobile, international, and frequent traders. Besides, they also won an award as Top Performing Broker by the Preqin Service Providers, and Best Overall Broker by Investopedia (Best for Low Costs, Best for International Trading, Best for Options Trading, Best for Day Trading, and Best for Penny Stocks). The awards are not only achieved during 2019. Since 2005, Interactive Brokers has won lots of awards regarding its best services for clients.
To optimize clients' trading speed and efficiency, Interactive Brokers provides some powerful suites of trading platforms. Below is the list:
-
Client Portal
A one-stop destination to check quotes and place trades, see account balances, Profit and Loss, as well as key performance metrics, funding, and reporting. -
Desktop TWS
A flagship platform designed for active traders and investors who trade multiple products and require power and flexibility. Opening an account in Interactive Brokers and using this platform allows traders to utilize the most advanced algorithms and trading tools, as well as a library of tools and asset-based trading layouts for optimum customization. -
IBKR TWS for Mobile
The IBKR TWS for Mobile is made for traders who want to easily trade and monitor their IBKR account on-the-go from either iOS or Android device (tablet or smartphone). -
IBoT
IBoT is a robot for finding information and placing orders using clients' own words. IBot is available on TWS for Desktop, IBKR Mobile, and Client Portal. -
IBKR WebTrader
IBKR WebTrader is made for traders and investors who prefer a simplified interface. -
IBKR APIs or IBKR Pro
This trading platform is provided especially for traders and investors who want to write their trading software or automated trading programs; third-party software users.
Overall, Interactive Brokers has always been a great choice for those who want to find out a credible and regulated broker for trading. Offering lots of trading platforms, Interactive Brokers has committed to provide their best services for both novices and professionals, since it is suited to every clients' needs.
Offshore Forex Brokers
Now, let's move to discuss offshore forex brokers. Although there is no official classification, the term "offshore forex brokers" is commonly applied to those who establish a business in typical areas such as St.Vincent and Grenadines, British Virgin Islands, Cayman Islands, Seychelles, Mauritius, and the island nation of Vanuatu.
The main characteristic of these offshore brokers is that they typically function in a more lenient regulatory environment than the US, UK, or EU. This lower entry barrier for brokerage business and forex trading made these locations popular destinations among new brokers and traders alike.
Some of the most well-known offshore brokers are FBS, OctaFX, and InstaForex. So, let's go ahead and review their features.
1. FBS
FBS, founded in 2009 and based in Belize, has expanded globally and established a presence in multiple countries. The company operates under different entities regulated by financial authorities, including the IFSC in Belize and CySEC in Cyprus.
FBS offers a diverse range of tradable financial instruments, such as forex pairs, stocks, commodities, indices, and cryptocurrencies. The availability of these instruments may vary based on account types and regulatory restrictions.
To cater to the needs of traders, FBS provides various types of trading accounts. FBS is good for day trading because the broker has a leverage of 1:3000 which is the highest leverage.
As an international broker that offers trading in 28 forex pairs, 10 cryptocurrencies, and two commodities, FBS broker has an enormous number of clients from over 150 countries worldwide.
When it comes to funding and withdrawals, FBS allows minimum deposit $125 for Standard Account, $12.5 for Cent Account, and $1 only for crypto account.
FBS supports multiple payment methods such as bank transfers, credit/debit cards, e-wallets like Neteller, Skrill, and Perfect Money, and local payment options tailored to the trader's country of residence.
Since 2009, the action of FBS Holding Inc. or known as FBS in the world of forex trading has been recognized by various international institutions. With clients reaching 14 million as of 2019, FBS has received the title of Most Transparent Forex Broker 2018, Best Investor Education 2017, Best Customer Service Broker Asia 2016, IB FX Program, and many others.
FBS is regulated by FSC Belize and CySEC Cyprus. This broker has been trusted by millions of traders and 370 thousand partners from various countries. Based on their data, FBS garners about 7,000 new traders and partner accounts every day. And, 80% of the clients stay in the FBS for a long time. No wonder the broker is growing rapidly due to the incredible growth in the number of clients.
Trading products offered by FBS range from forex, CFD, precious metal, and stock. For forex trading, CySEC-regulated FBS offers leverage up to 1:30 on Cent and Standard Accounts. Clients who want to try higher leverage than that can alternatively register an account under FBS Belize.
FBS spread begins from 0.5 pips for Pro account type and from 0.7 pips for Standard and Cent accounts. On a standard account, volume orders can be made from 0.01 to 500 lots. Therefore, this account is recommended for experienced traders.
Whereas on Cent Accounts, volume orders can be carried out with a maximum of 500 cent lots or the equivalent of 5 standard lots. Cent Accounts involve a different level of risk. FBS recommends Cent Accounts for beginner traders. All account types support the following trading instruments: 36 Forex pairs, 8 metals, 3 energies, 11 indices, 127 stocks, 5 crypto pairs.
Before plunging into the real forex market, traders can practice with FBS Demo Account which consists of two types, i.e Standard and Cent.
FBS uses the MetaTrader 4 and MetaTrader 5 platforms. They offer them on Windows and Mac as well as Android and iOS mobile. These platforms provide a trading experience at traders' fingertips, allowing traders to progress as a trader anywhere at any time.
MetaTrader platforms also have a variety of mainstay features, including the possibility to create, buy, and use expert advisors (EA) and scripts, One-click trading and embedded news, technical analysis tools, the possibility to copy deals from other traders, hedging positions, and VPS service support.
Another advantage provided by FBS is a deposit bonus of 100% for clients who fulfill certain requirements. The process of FSCing and withdrawing funds can be run easily and quickly. Based on clients' testimonies, each process usually takes no more than 3-4 hours, except on holidays.
Traders also have the opportunity to develop a side business when trading with FBS, namely as an Introducing Broker (IB) or Affiliate. The FBS partnership system provides partner commissions that are already in 3 level positions. Only by introducing new clients to FBS according to certain procedures, traders can earn extra income.
Traders will also get trading education experience at FBS. They have prepared a comprehensive forex course. The course consists of 4 levels: beginner, elementary, intermediate, and experienced. Traders can take courses that will turn them from newbies to professionals. All materials are well-structured. Besides, FBS provides various forex analyzes, webinars, forex news, and daily market analysis that can be accessed easily on their site.
Traders can access the FBS website with many language choices. Of course, this will increasingly provide comfort for traders. Available languages include English, Italian, French, Portuguese, Indonesian, Spanish, and others. Live chat support is also provided 24 hours 7 days a week.
In conclusion, FBS is a widely known broker among retail traders around the world. It continually grows to become a preferred broker because of flexible trading conditions that enable its clients to trade with various instruments, low deposit, and other trading advantages.
2. OctaFX
Founded in 2011 and headquartered in Saint Vincent and the Grenadines, OctaFX is a global brokerage firm catering to clients from diverse countries. OctaFX operates through regulated entities, including the FSA in Saint Vincent and the Grenadines and the CySEC in Cyprus.
The broker offers forex as well as CFD trading on various instruments, including 16 stocks, 10 indices, 35 forex pairs, 5 commodities, and 30 cryptocurrencies across the popular MT4 and MT5 platforms.
To meet the needs of different traders, OctaFX offers various types of trading accounts with minimum deposit starts of $25.
Additionally, OctaFX provides leverage from 1:25 to 1:500. Plus, this broker also offers many bonuses and promotions for all traders.
3. InstaForex
InstaForex is a globally operating brokerage headquartered in Russia. The broker which was established in 2007 is a globally operating brokerage firm that serves more than 7 million active traders from various countries. InstaForex operates through regulated entities, including the CySEC in Cyprus and the FSC in Saint Vincent and the Grenadines.
InstaForex provides 107 currency instruments that include 83 CFDs on US stocks, contracts on gold and silver, and CFDs on Futures. To meet the diverse needs of traders, InstaForex offers a range of trading account types, with leverage from 1:1 to 1:1000.
InstaForex provides customer support services to assist clients with their inquiries and concerns, offering support through various channels like live chat, email, phone, and occasionally social media platforms. Also, you won't miss the initial deposit for InstaForex which start from $1 only.
InstaForex is an international broker that provides trading services to traders globally. Since it was founded in 2007, InstaForex has provided for clients from various countries as many as 7 million traders. Based in Kaliningrad, Russia, InstaForex always attempts to improve the quality of the company in order to captivate the hearts of their clients.
Their hard work can be proven, one of which is by achieving a variety of awards, including Best Forex Cryptocurrency Trading Platform 2018 by UK Forex Awards, Best ECN Broker Asia 2018 by IBM, Forex Broker of the Year for Eastern Europe 2018 according to le Fonti Awards, Development, and Success award at Financial Olympus 2016-2017, etc.
There are 4 types of account offered by InstaForex representing a universal trading tool that help to work on international financial markets, such as Insta.Standard, Insta.Eurica, Cent.Standard, dan Cent.Eurica. Trading account types differ by the methods of accounting spreads and commissions, which are picked by the trader opening an account.
Insta.Standard account is relevant for standard trading terms on the Forex market and allows a trade to be settled with classical spread and with no fees. Traders will be charged a fixed spread every time they make a transaction. Spreads that are provided ranging from 3-7 pips. The main advantage of this type of accounts is its universality, as a trader can change the trading leverage and work with a deposit size convenient for traders.
Different from Insta.Standard accounts, Insta.Eurica accounts do not require payment of any spread on opening a deal. Therefore, this type of InstaForex account is suitable for beginner trader with a minimum transaction of 0.01 lots.
There are also other types of accounts InstaForex, namely Cent.Standard and Cent.Eurica which can be used for beginner traders because they can use the minimum transaction volume, which is 0.0001 lots (the cost per lot is USD0.1 cent). Deposit currencies that can be used by traders are EUR and USD (for all types of accounts).
Trading in InstaForex is quite a given as traders can choose to trade with leverage between 1:1 to 1:1,000. With a minimum initial deposit requirement of only USD1 (for all types of accounts), InstaForex clients have the opportunity to get a 30% to 100% deposit bonus.
Not only that, but beginner traders are also exempt from confusion in determining forex trading strategies. Because Instaforex provides ForexCopy services that allow traders to copy orders from professional traders in just a few minutes.
And then, there are around 300 trading instruments offered by InstaForex for traders. In addition to currency pairs, there are also futures, shares, gold, silver, CFDs, Bitcoin, and others.
Every InstaForex client is free to choose a trading platform that can be tailored to their needs. There are four types of trading platforms available, including InstaBinary, WebIFX, MetaTrader4, and MetaTrader5. Each platform has advantages and disadvantages. InstaForex also provides video tutorials on how to register on each platform. It aims to make it easy for beginner traders who want to join InstaForex.
If a trader still confused after seeing the video tutorials, traders can contact customer service available 24 hours connected to various social media, including email, Skype, Whatsapp, Telegram, Viber, Twitter, and Phone Call. On the InstaForex website, there are around 30 languages provided to facilitate traders from various countries.
The trader can also help themselves with trading calculators provided on the InstaForex website. Traders can accumulate currency pairs, Leverage, volume, and currency used.
The payment system in InstaForex is also diverse. Traders can pay deposits via Visa, Mastercard, Skrill, Neteller, PayCo, as well as Wire Transfer. All in all, InstaForex is a well-rounded broker for many types of traders.
Key Differences Between the US and Offshore Forex Brokers
Upon reviewing the main features offered by the US and Offshore forex brokers, there are several key differences that may affect the way forex traders manage their accounts and trading strategies.
Regulation
- US: In the United States, the Commodities and Futures Trading Commission (CFTC) is responsible to ensure the regulation of forex trading and brokerage business. The CFTC achieves this goal with powers granted by law, such as enforcement by using steep fines, heavy financial penalties, and even outright banishment from the US market.
- Offshore: Offshore brokers are typically regulated as well, but not as tight as the regulation being enforced 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).
Leverage Caps
- US: In America, the Commodities and Futures Trading Commission (CFTC) has set the maximum limit for leverage to 1:50 for forex majors and 1:20 for forex minors and forex options. These leverage limits are backed by the Dodd-Frank Act; a US law passed in 2010. The law distinguished retail traders and classified them as "unsophisticated investors" that needed to be protected from leverage abuse.
- Offshore: Almost every offshore broker provides a generous amount of leverage, sometimes even as high as 1:2000. The leverage provided to traders ranges from 1:25, 1:500, 1:1000, and 1:2000. Traders are free to choose from any leverage option available to trade their preferred currency pairs.
Minimum Account Deposit
- US: Forex brokers in the US require traders to deposit a minimum of $50 as an account opening balance.
- Offshore: The minimum deposit for account opening balance is more lenient; traders can open forex accounts with just $10 on some offshore platforms.
Client
- US: US forex brokers are allowed to serve only US citizens and US permanent residents.
- Offshore: Offshore brokers can serve clients from all over the world.
Asset Index
- US: Every asset traded on the platform must be exchange-listed, i.e. the assets must be listed on the US markets. This means CFD trading by retail investors is banned in America.
- Offshore: Offshore forex brokers allow traders to trade CFD assets on their platforms without any restrictions.
Setup Costs for Brokerage
- US: Forex brokers in the US are expected to have at least $20 million in operational capital. Reporting requirements are extremely strict. Non-compliance can be fatal for brokers as fines and penalties are reportedly very expensive.
- Offshore: The capital requirement to open forex brokerage in offshore countries is quite low. On average, companies usually spend less than $200,000 for license and other setup costs.
The Main Takeaways
Now that we have clearly defined the differences between the US and offshore forex brokers, we can safely summarize four-point differences that will directly impact forex traders:
Regulatory Environment
Having a regulated broker usually spells better consumer protection. CFTC has always been strong on consumer protection, although they do have some complaints by consumers caused by brokers' misconducts.
Offshore brokers regulators are also well known to offer good consumer protection, even though they might be a little bit more lenient than the US regulator. IFSC even offers investor compensation fund in case the broker proves to be negligent or conduct any kind of improper operation.
Leverage & Margin Requirements
The leverage allowed for US forex broker is capped between 1: 20 up to 1:50, while offshore forex brokers usually offer leverage from 1:25 to 1:2000. The leverage limitation causes forex trading to be more expensive in the United States than in offshore areas since there will be higher increased margin requirements for traders.
Leverage and margin requirements have great implications on forex traders, especially for rookies. First, it means that US forex traders lack the option to use small accounts. It will also imply position sizing on trades if the trader chooses to stick with acceptable risk management standards.
The combination of the difference in leverage, margin requirements, position-sizing, and risk management principles makes offshore brokers as a more attractive option to forex traders around the world. Historical data also showed that the US forex market did lose a remarkable amount of market share to offshore brokers on this point alone.
Location of Clients
The CFTC limit US forex brokers to serve customer located within the United States only. On the other side, offshore brokers are allowed to serve clients from any part of the world, without any form of limitation or discrimination.
But, offshore brokers are not given free rein to market their products to US forex clients, in what many people consider as protectionism taken a bit too far.
Assets Availability
You will not see any CFD products or assets listed for trading on US forex broker platforms, since the CFTC bans any form of CFD or assets listed for trading in the US. In contrast, offshore brokers offer CFDs. So if you love to trade CFDs on stocks, indices, metals, and other commodities, you can only trade with offshore forex brokers.
Apart from the US and offshore forex brokers, another broker category to consider is a ion of UK forex brokers. How are their specifications and what do they offer for retail forex traders? Find out in Top 10 Forex Brokers in the United Kingdom.