What Is the Legality of Online Trading in the US?

By maintaining strict rules, the US regulatory body ensures that its financial system remains trusted.

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Online trading is a global trend that has changed how people invest in financial markets. The trend has seen a significant increase in popularity in the US, thanks primarily to easy-to-use platforms that make trading more accessible. These platforms enable traders to see and trade in markets anytime and anywhere. But the US has some of the strictest trading rules in the world. This article is a deep dive into US trading regulations to give you a clear and in-depth perspective on the laws of trading in the United States.

Overview of Trading in the US

Online trading, also known as eTrading, has recently become a hot topic in the US. One major reason is the rise of online trading platforms, which provide easy accessibility and an easier way to analyze financial markets. However, there are risks, which is why regulations have been implemented. 

In the United States, there are several bodies governing trading activities. They all have a common goal: to ensure a fair and transparent market. The primary regulatory bodies include:

• Commodity Futures Trading Commission (CFTC): The CFTC regulates the US derivatives markets encompassing cryptocurrency and forex. The commission aims to protect market participants from possible fraud and manipulation.

• National Futures Association (NFA): This self-regulatory organization oversees the derivatives industry. It works alongside the CFTC to enforce compliance with industry standards and provides traders with education and resources.

• Securities and Exchange Commission (SEC): This is the financial regulator responsible for enforcing federal securities laws. The commission regulates the securities markets to prioritize market fairness and investor protection.

• Financial Industry Regulatory Authority (FINRA): This organization oversees registered brokers in the United States. It ensures that the financial markets are not compromised, maintaining their integrity.

Brokers Obligation

Although trading a wide range of financial markets in the US is legal, brokers must follow strict rules to keep investors safe. These regulations are the foundation of their legal obligations.

Brokers must first register with the Commodity Futures Trading Commission (CFTC). This act confirms them as licensed operators in the region. They must also join the National Futures Association (NFA). The purpose of this requirement is to ensure the safety of everyone involved.

The Commodity Futures Trading Commission (CFTC) enforces transparency by requiring intermediaries such as brokers and advisors to register and submit regular reports. Meanwhile, the National Futures Association (NFA) provides traders with a valuable tool through its BASIC database (Background Affiliation Status Information Center), which allows users to verify the registration and record-keeping status of brokers and individuals.

Brokers operating in the United States are required to comply with strict leverage limits set by the CFTC. For example, leverage is capped at 50:1 for major currency pairs and 20:1 for minor currency pairs.

Under US regulations, hedging, a common strategy in which traders hold two opposing positions on the same currency pair, is also banned. The NFA introduced Rule 2-43b, which enforces the FIFO rule (First In, First Out). According to this rule, the earliest position must be closed first if a trader opens multiple positions on the same currency pair. 

Also, US regulations strictly prohibit the trading of Contracts for Difference (CFDs), and brokers are not allowed to offer these products to US citizens. CFDs offer leveraged trading across stocks, indices, and commodities and are widely popular in markets like the UK, Europe, Canada, and Australia.

Traders Obligation

Traders don’t have to do much, but they should take a few essential steps before selecting a broker. First and foremost, they need to confirm that the broker is properly regulated in the United States. The BASIC database is an excellent online resource for traders to verify a broker’s status.

Traders also have an obligation to comply with the Foreign Account Tax Compliance Act (FATCA). Therefore, they must declare any gains or losses to the IRS, including reporting profits or losses from currency exchange transactions.

The Consequences of Non-Compliance

Traders who fail to comply with the United States regulations on online trading risk serious consequences. Some of them include:

• Account Restrictions: If a trader violates any of the rules, the regulatory authority in charge can restrict their trading accounts as a warning. The restriction may last a few days or more, depending on the nature of the offense. In cases of intentional misconduct, traders or firms could be permanently barred from the financial industry.

• Fines: Another penalty for breaking the trading law is to pay a fine. The specific fine will be determined by the degree of the violation. 

• Imprisonment: If the violation is serious, the trader may face criminal charges and, in many cases, be sentenced to prison.

• Disgorgement of Profits: A trader may be ordered to return the profits from a trade. This usually applies to profits made from trades based on nonpublic information. 

These penalties are not to deter people from trading but to maintain standards of safety, fair play, and overall equity of market access. 

Why US Trading Laws Are Stricter Than Other Countries

The United States is known for its strict trading rules. But on a closer look, they all point in the same direction: protecting the economy and investors. Let’s take a look at a few:

Preventing Fraud and Scams

The US financial market is massive and highly active, making it an easy target for fraudsters. So, to stop scams like fake investment schemes or market manipulation, strict laws are necessary.

Protecting Investors

Not everyone trading is an expert. Therefore, some people might not fully understand the risks. By imposing strict laws, the US government shields these investors from losing money to untrustworthy brokers or risky practices.

Accountability

Brokers and financial firms have the tendency to act out of character without proper oversight. However, in the US, they must follow certain procedures to ensure they’re legitimate and operate transparently.

Strict Regulations Build Trust and Global Confidence

In the US, trading activities are not prohibited. They are only governed by strict laws. This is to ensure that traders operate within the boundaries of the law. By maintaining strict rules, the US regulatory body ensures that its financial system remains trusted. This standard sets the bar for the rest of the world. It also increases the interest of foreign investors in its economy.