How to trade legally online in United States and Europe

Online trading is bigger than ever and the interest has spiked during the ongoing financial meltdown that was set of due to the coronavirus outbreak. Yet, many people are unsure of how the markets are regulated and what you are allowed and not allowed to do.

Online trading

This confusion only gets worse since the online trading rules differ a lot in the United States compared with in Europe.

Because of this, we thought we’d take this opportunities to shed some light on the trading rules of the Western World.

Two Different Online Trading Concepts

Before we get into the nitty-gritty, we need to clarify a couple of things.

First, online trading refers to trading with online brokers offering derivatives and trading platforms that are completely online-based. That means that it doesn’t include “traditional brokers” with online trading features, such as TD Ameritrade or Charles Schwab.

Second, the two most common ways to trade online today is Contract for Difference (CFDs) which is a type of derivative that can be based on any underlying asset from stocks and commodities to indices, options, bonds, and cryptocurrencies. Moreover, forex trading is most often offered by online brokers offering CFDs.

Note: in certain regions, you can also trade binary options which share some similarities with CFD trading.

And with that said, let’s take a look at the trading regulation.

Online Trading in the United States

Online trading is legal in the United States with regulated and licensed brokers offering forex trading. However, CFD trading is completely banned in every state, unlike in Europe where brokers can offer both forex and CFDs, but more about that in a second.

In other words, as an American trader, you are only able to trade forex with online brokers. Although, that isn’t necessarily bad. You see, the forex market is the biggest market in the world and it provides a huge selection of trading opportunities on some of the world’s most exciting assets, ie. currencies.

Regulatory Bodies to Keep in Mind the United States

Before you get started trading forex in the U.S, it can be a good idea to know which organisations and bodies that are responsible to oversee the markets. Below, you’ll find a list of the biggest financial regulatory bodies in the country.

Securities and Exchange Commission (SEC) – is the main regulatory bodies overseeing the stock market and much more.

Commodity Futures Trading Commission (CFTC) – this is also one of the top regulatory bodies and it’s mainly their responsibility to oversee forex brokers in the U.S.

Federal Reserve System (the Fed) –  is the central banking system in the United States and therefore the highest governing body for the financial markets in the country.

 Online Trading in Europe

Unlike in the U.S., the online trading industry in the European Union and the United Kingdom is bigger and more inclusive. For example, both CFD and forex trading is legal and fully regulated as long as it’s done using licensed brokers. The only exception is Belgium where online trading is banned.

In recent years, a lot has been done to improve the safety of the market in the country. The use of leverage has been limited, the rules that apply to online brokers have been tightened.

Regulatory Bodies to Keep in Mind in Europe

Similar to the U.S., several regulatory bodies are responsible for safe-keeping the online trading industry. At the moment, the following three bodies are the main ones.

The European Securities and Markets Authority (ESMA) – this is the official financial regulatory agency and supervisory agency of the European Union. All other financial regulatory bodies operate under them.

The Financial Conduct Authority (FCA) – the FCA is the financial regulatory body in the United Kingdom. Among other things, it’s their job to issue licenses to online brokers that operate in the UK.

Cyprus Securities and Exchange Commission (CySEC) – the CySEC is responsible for issuing broker licenses to brokers that operate in the European Union. Subsequently, that means that every legitimate broker in the EU must have a license from the CySEC, alternatively from one of the member countries’ central banks.

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