CFD Trading In The USA
CFDs are generally not available to retail traders in the US under SEC and CFTC rules. Most CFD brokers do not accept US residents. As an alternative, consider exchange-traded futures or options.
If you want to know about CFD trading in the USA we answer all your questions in this tutorial. Is trading CFDs illegal or allowed? How do you find the best CFD brokerages for trading US markets (for non-US residents)? Read on for answers to these questions, including a thorough look at the rules around CFD trading in the United States and US regulatory restrictions.
Top CFD Brokers In The USA
These are the top 4 brokers for trading CFDs. They may offer CFDs on US markets but are not authorized by US regulators.
List of Best CFD Trading Brokers
What Is CFD Trading?
Contracts for difference (CFDs) are agreements between buyers and sellers to pay the difference between the current value of a security or other underlying asset and the price at the contract time. They are also derivatives, meaning you don’t hold the underlying asset.
CFDs are particularly popular for a couple of reasons:
- Markets – Traders can buy online CFDs on stocks and shares, forex, indices, commodities, cryptocurrencies, futures, options, commodities, plus many more markets.
- Leverage – Trading can be financed by putting down a small percentage of a trade, known as margin, and borrowing the rest from a brokerage firm. This increases potential profits but also potential losses.
Is CFD Trading Legal In The USA?
Trading CFDs is not available to retail traders through US-regulated brokers from the United States. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) do not permit US-regulated firms to offer CFDs to retail clients, and as a result most regulated offshore brokers also refuse to open accounts for US residents or US persons.
The U.S. regulatory framework classifies CFDs within the swaps security-based swaps regime and imposes restrictions that essentially make retail CFD dealing unavailable.
CFDs are generally structured as over-the-counter (OTC), leveraged derivative contracts, not passing through regulated exchanges. Also, American regulators have concerns over the possibility of large losses stemming from using leverage. Despite this, some US residents do turn to offshore companies for access to CFDs. But that does come with risks, one of which is finding an adequately regulated option. Most FCA regulated trading firms, for example, do not allow US residents or US persons to open an online CFD trading account.
Non-US citizens, however, can trade CFDs on American shares and markets. The restrictions only apply to US residents and US persons.
Note! The remainder of this article is for traders based outside the United States who are legally allowed to engage in CFD trading in their respective jurisdictions.
How To Trade CFDs In The USA
How To Trade CFDs On US Markets (For Non-US Residents)
For non-American citizens, getting started with CFD trading is straightforward:
- Find a CFD brokerage – First and foremost, check they are regulated by a reputable financial authority. Then make sure any commissions and fees are competitive. Also, check their platform is reliable and suits your trading style. Who the best CFD brokerage companies are for US index funds and markets will come down to personal choice. But use our CFD brokerages list to narrow your search to a few high-quality and regulated providers.
- Open an account – Lots of providers offer multiple accounts. In general, the larger the initial deposit, the better the pricing tiers or additional tools available, though leverage limits are often set by regulation rather than deposit size.
- Find a market opportunity – Identify an opportunity in your chosen market, on the USD/JPY currency pair for example. Do you think the price is about to rise or fall? Once you’ve decided, how much margin do you want to trade on? Develop a CFD trading strategy.
- Take a position – Open the trade ticket on your platform and enter a position. Add a stop-loss order to curtail losses when they hit a certain point, and a stop-limit order to lock down profits when they reach a set level.
- Monitor & exit – In line with your strategy, exit the position when your charts and tools tell you it’s the right time. Try not to let emotions guide the decision-making process.
Platforms for CFD trading on US markets (for non-US residents) come in all shapes and sizes. You’ll find the popular MetaTrader systems, plus bespoke software available on both desktop and mobile devices. Each user has their own needs and preferences depending on their strategy.
A great way to check whether a platform will be a good fit is to open a CFD demo account. With your demo login details, you can test charts, pattern recognition functionality and more.
Risks Of CFD Trading
- CFDs are complex and high-risk instruments. As they’re leveraged products, traders can bear significantly more risk relative to trading unleveraged assets. Small market movements can produce large gains or losses relative to the margin posted. Please be mindful that margin calls and forced liquidations occur when the account equity drops below maintenance margin requirements. Positions may be automatically closed by the broker.
- Overnight financial charges (i.e., swap fees) apply to positions that are held beyond the trading session. These costs can add up and make a dent on profitability. Day traders avoid these charges, however.
- Slippage and volatility risk can also affect execution. Low-liquidity periods, data releases, and major economic announcements from e.g. the Fed, can exacerbate this.
- Retail loss rates in CFD trading are high. Many brokers disclose that between 70-85% of retail accounts traded with them lose money trading CFDs. As such, proper risk management is vital when trading these products.
Alternatives To CFDs For US Traders
Although CFDs are not available to US traders, alternative instruments to gain leveraged exposure exist.
Futures contracts are among the most popular CFD substitutes. Futures are traded on regulated exchanges such as CME, and provide leveraged exposure on major indices, commodities, currencies, interest rates, and bonds. Futures are centrally cleared. They operate under CFTC oversight. Leverage costs are embedded in these products as they influence the shape of the futures curve and their prices relative to spot.
- Options are another CFD alternative. Calls and puts can be used to hedge positions in the underlying or trade price movements. Options are available through regulated US brokers and can be traded on stocks, ETFs, and indices.
- Leveraged ETFs provide traders a way to gain amplified exposure to a particular index, asset class, or security without using margin directly. These products reset daily and therefore are not suitable for long-term investing due to tracking error.
- Margin stock trading provides leverage within the context of regulatory limits that are set by FINRA and the Federal Reserve.
- Forex trading for retail clients is permitted in the US via CFTC and NFA-regulated brokers. Leverage is still generally capped relative to CFD jurisdictions.
Overall, these products/instruments give US traders legal, regulated pathways to obtaining similar exposure to what CFDs can provide to international clients.
Tax Treatment Of CFDs
The tax treatment of CFDs varies by country. As CFDs are derivative contracts and are not actual ownership of underlying assets, the tax classification of these instruments can differ from traditional share investing.
US residents generally do not face any kind of CFD-specific tax treatment via regulated brokers as CFDs aren’t offered domestically. Accessing offshore providers may create complex reporting obligations.
For more information on CFD tax treatment, please see our dedicated CFD tax guide.
Why CFDs Are Restricted In The United States
The regulatory framework in the Untied States emphasizes exchange-traded and centrally cleared derivatives.
Under post-financial-crisis reforms, including provisions introduced via Dodd-Frank legislation, many derivative products are required to satisfy clearing and transparency standards.
CFDs are commonly structured as bilateral over-the-counter contracts between a client and a broker. The instruments don’t trade on centralized exchanges and aren’t cleared through US clearinghouses (e.g., CME Clearing, ICE Clear US, OCC, DTC)
US regulators have traditionally been concerned about products that provide high retail leverage and counterparty exposure, as well as the marketing practices of CFD providers in some jurisdictions.
As a consequence, CFDs are not offered by US-regulated broker to retail clients. Moreover, most reputable international brokers are often unwilling to accept US clients due to the associated regulatory risk.
Final Word
For traders based in the US, CFD trading is currently not available through US-regulated brokers. But while US residents and US persons generally cannot open CFD accounts with regulated providers, traders from many other countries can buy and sell CFDs on US markets.
But remember, most retail clients lose money when trading CFDs. Take into account all of the considerations above when looking for the best firms and platforms available in your jurisdiction.
FAQs
Is CFD Trading Allowed In The USA?
CFD trading is banned and illegal for citizens from the USA. The concerns over the leveraged OTC product combined with the increased regulatory scrutiny following the 2008 financial crisis, have resulted in the SEC taking a dim view of CFD products.
With that said, traders from other countries can buy and sell CFDs on US markets.
Is CFD Trading In The USA Likely To Be Allowed In The Future?
It is hard to predict whether trading CFDs will one day be allowed in the USA. Some argue that if legislators do not make CFDs legal, the US equity trading market will continue to lose volume and liquidity. But until the law does change, CFDs remain banned.
Can I Trade CFDs In The USA?
If you are a US citizen or resident, you cannot trade CFDs. Most providers simply won’t let you open a trading account. However, if you’re from countries such as the UK or Australia, among others, you can still trade CFDs on American securities.
Will I Make Money Trading CFDs In The USA?
There are no guarantees you’ll generate profits day trading CFDs on US stocks, for example. CFDs are extremely risky due to their leveraged nature. Do not open a CFD trading account until you understand the risks.