Online trading has risen starkly in popularity since internet-based brokers first appeared. Before the establishment of the internet, traders would have to contact brokers by phone, and the brokers themselves would have to be in direct contact with someone on the trading or exchange floor.
These days anyone can become a trader. All they need is a computer, an internet connection and enough money to make a reasonable investment. The majority of internet-based trades are done using binary options, forex (foreign exchanges) or CFDs (contract for difference). The internet has, however, made online brokers difficult to police, and as a result thousands of traders are cheated out of millions of dollars every year.
Different jurisdictions take different approaches to the regulation of online trading. Here is a quick review of the regulation policies of a number of leading jurisdictions.
Forex trading and CFD trading are controlled by the Financial Conduct Authority (FCA) in the UK. A broker based in the UK cannot offer services to UK traders without an FCA licence, as this article explains.
Binary options trading is currently regarded as ‘gambling’ by the UK government. Because of this, regulation for binary options trading falls under the remit of the UK Gambling Commission, although there is no specific regulation currently in place.
UK traders are free to use offshore brokers, although it is the recommendation of the FCA that they do not.
In the USA, forex trading is regulated by the National Futures Association (NFA), which is an independent regulator. The NFA provides licences for US-based forex brokers.
CFDs are illegal in the USA. This illegality has been decreed by the Securities and Exchange Commission (SEC).
Binary options brokers are regulated by SEC and the Commodity Futures Trading Commission (CFTC). Brokers cannot offer binary options to US-based traders without the necessary licensing. USA traders are permitted to use offshore brokers without fear of prosecution, but they do so at their own risk.
All financial instruments – including binary options – are regulated by the Australian Securities and Investments Commission (ASIC). Australian traders are advised to use only brokers that are regulated by ASIC.
It is illegal for brokers who do not have an ASIC licence to offer their services to Australian citizens, or take on Australian citizens as clients. ASIC have cracked down several times upon brokers whom disobey these rules.
As with the USA, traders are allowed to use offshore brokers for all forms of trading in Canada, but do so at their own risk.
Forex traders in Canada must be registered both in the province in which they trade, and with the Investment Industry Regulatory Organisation of Canada (IIROC). Unlike the USA, the Canadian authorities allow for trading in CFDs.
Binary options brokers based in Canada must have a licence from the Canadian Securities Administrators (CSA). No broker, though, as yet has been issued with a licence by the CSA, and that fact is unlikely to change in the near future.
Trading in France in forex and CFD markets is regulated by L’Autorité des marchés financiers (AMF), an independent regulatory body. French citizens are free to use offshore brokers for trading, but are advised by the AMF not to.
Binary options brokers may not offer their services to French traders. Even advertising them is illegal.
Cyprus has become a hot-bed of binary options licensing, thanks to the Cyprus Securities and Exchanges Commission (CySEC). CySEC is the leading regulator of binary options brokers world-wide, and provides licences for dozens of brokers all over the globe.
In August 2016 the Belgium authorities, having grown tired of issuing warnings against bogus companies, banned online trading in binary options, forex markets and CFDs.
The Netherlands has followed France’s example and advised its citizens that online forex, binary options and CFDs products are ‘toxic’. While not illegal themselves, the advertising of such products is not permitted.
Upon review, when it comes to forex trading, CFDs and binary options, there is absolutely no clear, global consensus. Some jurisdictions such as the UK give all these financial instruments the thumbs up (with caveats about bogus brokers). Others – such as Belgium – exercise a complete ban, as this new infographic on the history of binary options reveals.
If you wish to trade using any of these financial instruments then it’s really the luck of the draw depending upon your residential area. One aspect of trading is universal though – make sure any trades you undertake are done via a properly licensed and regulated trading broker.