While forex trading continues to grow and become ever more popular around the world, the practice continues to shrink in the US. This may seem counter intuitive considering the large population and potential market, but it is indeed happening. There are also some reasons for this unpopularity of the forex market in the US, with the main ones being:
Few forex brokers are available
There are hundreds of active forex brokers around the world today, most of them licensed by reputable financial regulators. Yet of all these brokers, only a handful are based in the US or even operate within the US. Just like any other business, the forex market cannot grow unless the providers are there to offer the product. This lack of forex brokers in the US has thus made FX trading to be unpopular in the US.
So, why are there only a few brokers left in the US? During the turn of the century, in the early 2000s when the retail forex market was growing exponentially, there were just as many forex brokers operating in the US as any other region. After the 2008 financial crisis, though, new regulations were passed under the Dodd-Frank Act of 2011, and these introduced tougher regulations. For example, forex brokers were required to have at least $20 million in capital with a liquidity provider. Besides, the NFA has a history of imposing very harsh penalties on forex brokers for even minor irregularities.
These and other restrictive regulations forced many forex brokers to leave the US market, leaving the UK market with a limited number of forex brokers.
Unfavourable trading conditions for clients
The retail forex market only grew so much because it was favourable to all clients regardless of their capital. Use of leverage to control higher valued assets definitely helped this along, allowing traders with as little as $500 and even $200 to participate. However, the same Dodd-Frank Act of 2011 placed a cap on leverage at 1:50 and no more. For many individual investors without a lot of capital, this is quite a difficulty.
In other regions like the UK and EU, leverage can be as high as 1:500, or even higher, and that really helps small investors to participate. It’s not just the leverage either, but other features too like hedging that have been abolished. Due to all these restrictive policies, US regulations have made US traders avoid the forex market, thus making the practice unpopular.
In the US, forex trading has not yet been popularized as much as conventional methods of investment like stocks. Remember, stock trading became popularized by the US in the late 19th century and early 20th century, growing to what it is today. By the time retail forex trading become popular in the early 2000s, the stock market in the US had already become fully developed and well advanced.
Meanwhile, developing economies were only just starting to build their stock markets and trading systems. Thus, when forex brokers came along with already developed and easy-to-use systems for the forex market, these economies jumped at the chance. As for the US market, conventional investment solutions still reign, and that is why the forex market is not very popular in the US compared to other countries around the world.