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Forex (foreign exchange margin trading) is popular among a wide range of people because trading is available 24 hours a day and leverage can be used to start with a small amount of money. In order to handle FX,You need to open a " forex account" with a forex broker, but there is a big difference between "domestic forex brokers" and "foreign forex brokers". In this article, we will tell you the difference between domestic and overseas FX firms.
Contents
Characteristics of Domestic FX
Domestic FX Leverage
In 2019, there are about 70FX firms in Japan. At its peak, there were more than 200 firms, but they were weeded out to reach the current number. 2005, the FSA mandated the registration of FX firms and banned telephone and other forms of solicitation, which led to the elimination of unscrupulous firms. Leverage will be further regulated. Until now, it was possible to use high leverage of 100x or 200x, but in August2010, the leverage was regulated to a maximum of 50x, and in August2011, it was changed to a maximum of 25x. If leverage is reduced, the amount of margin required must be higher. These leverage restrictions will diminish the attractiveness of FX, which allows trading from small amounts. Moreover, leverage restrictions are still being discussed as of 2019, with a reduction to a "maximum of 10x " being considered.
Competition for services from domestic FX firms
Forex firms that used to sell high leverage are no longer able to take advantage of it due to regulations. They no longer compete on leverage. Instead, competition has shifted to extremely narrow "spreads" (the difference between the bid and offer prices, a kind of commission) and higher "swap points" (interest earned by holding a position in a high-interest currency). However, most domestic FX firms use the " DD method" (dealing desk, relative trading). In this method, a dealer selects traders' orders, and then "swallows" orders that are expected to lose or to be reversed by other traders, instead of passing them through the interbank. The trader's profit then becomes the FX firm's loss, and the FX firm can make a profit when the trader makes a loss. In other words, it is a conflict of interest.
The DD method allows FX firms to make profits by manipulating the spread to an extreme degree, stop-loss hunting (a stop-loss order set to cut losses is triggered to settle for a loss), slip pages unfavorable to the trader (orders flow and are executed at an unfavorable rate), and execution rejection. This is the reason why domestic spreads are extremely low. This ability to do so is why domestic spreads are extremely narrow.
With the DD method, the spread is extremely narrow, which makes the cost seem low, but there is little transparency in the transactions, and in reality, you may be paying more than you are getting in spread.
Characteristics of Overseas FX
Number of foreign FX companies
If you look overseas, the number of FX firms exceeds 1,000. However, most of them do not support Japanese language at all, so only a few of the major FX companies have Japanese language websites and Japanese staffs. Therefore, when using an overseas FX trader, your choices will inevitably be narrowed down. The FX firm that has received overwhelming support from Japanese traders is XM.
Many foreign FX firms, including XM, use the " NDD method" ( No Dealing Desk) instead of the DD method. NDD also works somewhat differently for STP andECN, but both allow orders to pass through to the interbank, so no dealer swallowing occurs. Since the spread is purely the profit of the FX firm, the more successful the trader and the more trades he/she makes, the more profit the FX firm makes. In other words, the trader's profit leads to the FX firm's profit. It is a win-win situation.
This is the reason why the NDD method has strong execution power, and slip pages and execution rejections rarely occur. The advantage of the NDD method is "high transparency of transactions. Although the spreads are wider than those of domestic forex brokers, the NDD method provides a safe environment in which you can concentrate on trading. Many traders around the world prefer the NDD method to the DD method. However, because it is an overseas FX firm, it is not necessarily the NDD method; some unscrupulous firms use the DD method and slip pages and execution rejection frequently occur, so when using an overseas FX firm, it is safe to choose a large firm that many traders use.
Regulation by ESMA
In addition, foreign FX firms are not registered with the Japanese FSA and are therefore not subject to domestic leverage regulations. 100x or 200x high leverage is commonplace in this world. This is a dream come true for traders who expect "high returns," but the situation has changed somewhat in recent years. This is because leverage regulation has also taken place abroad: in 2018, the ESMA (European Securities Market Inspectorate) has banned forex with high leverage in the EU. This has resulted in forex traders based in the Mediterranean taskhaven being subject to regulation, and their leverage has been significantly reduced. Large and well-established FX firms , such as FxPro, announced a sudden change in leverage in August2018, confusing traders. 500x leverage was reduced to a whopping 30x. In this way, there is little difference between domestic and international forex trading in terms of leverage.
XM was able to obtain a license from the Seychelles FSA in advance and set up a group company to guide Japanese traders to the Seychelles FSA, allowing them to continue ultra-high leverage trading without any problems today. You should not simply assume that because it is a foreign FX firm, you can trade with more leverage than you can in Japan, but you need to make sure that you know where they are based and how much leverage you can use. Please see our future articles for more information on leverage, zero-cut, deposits and withdrawals, taxation, and trading platforms, which differ greatly between domestic and international markets. If you expect transparency and greater returns, we recommend using an international forex broker rather than a domestic forex broker.
