Why has the US banned CFD trading?

On 1 August 2019, the Commodity Futures Trading Commission (CFTC) announced a ban on all Contracts for Difference (CFD) trading in the United States. The news surprised many in the industry, who scrambled to understand what this meant for them and their businesses. Now, years on into the ban, we take a closer look at CFDs and explore why the US decided to make that decision.

What are CFDs, and why have they been banned in the US?
A contract for difference (CFD) is a type of derivative trading product that allows investors to speculate on the price movements of underlying assets. CFDs are traded on margin, which means that investors can only put down a small percentage of the total value of the trade. It makes them a very high-risk investment product, as investors can quickly lose more money than they have invested.

The US ban on CFDs was part of a broader crackdown on speculative trading products that have been blamed for fuelling market volatility. The CFTC believed that banning CFDs will protect retail investors from being taken advantage of by unscrupulous brokers. This is because CFDs are traded in over-the-counter (OTC) markets rather than in centralised exchanges.

How do CFDs work, and what risks are involved in trading them?
CFDs are traded on margin and are short-term investments, which means that investors only need to put down a small percentage of the total value of the trade. It can lead to significant losses if the market moves against the investor.

Why do some people believe that CFDs are a scam, and are they?
There are many reasons why some people believe that CFD trading is a scam. One of the main reasons is that CFDs are traded on margin, which means that investors can only put down a small percentage of the trade’s total value to open a much larger position, which can lead to significant losses if the market moves against the investor.

Another reason why some people believe that CFDs are a scam because they are a very short-term investment product. Investors may not have enough time to react to sudden market changes, which can lead to heavy losses in a short timeframe.

Alternatives to CFD trading
If you want to invest in the stock market but do not want to take on the risk involved with CFDs, you can always look beyond this product.

Several alternative investment products are available that allow investors to speculate on the price movements of underlying assets without the same level of risk involved with CFDs. These products include futures, options, and exchange-traded funds (ETFs).

It is important to remember that all investments carry risk, and you should never invest more than you can afford to lose. You should always seek professional financial advice or gain a certain degree of clarity about the trade you are about to make before diving in.

How did the ban on CFD trading affect traders in the US and worldwide?
The ban on CFD trading in the US has had the biggest impact on US traders in the past few years. Previously, the US had been one of the main players of CFD trading worldwide. As the ban stipulated that US residents were not allowed to trade CFDs even when abroad or using overseas providers, this drew a harsh line in the sand when international CFD brokers prohibited US residents from even opening accounts.

The ban also impacted international CFD traders indirectly. As the large number of US traders are eliminated from the market, the remaining traders lost many potential trading partners, and the market became a lot less liquid.
What other countries have banned CFD trading?
The US is not the only country that has banned CFD trading. In January 2021, the UK’s Financial Conduct Authority (FCA) banned CFD trading, labelling it ‘ill-suited for retail consumers’. However, UK citizens may still open an account with overseas providers.

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