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Join us for our new webinar series

10 March 2015

Following on from our mini survey last week asking for your input on webinars, we’ve scheduled our first one for 20th March.  You gave us some great feedback on topics and the one that came up the most was around understanding more about how to become a DARWIN provider and manage investor capital legally on […]

Following on from our mini survey last week asking for your input on webinars, we’ve scheduled our first one for 20th March.  You gave us some great feedback on topics and the one that came up the most was around understanding more about how to become a DARWIN provider and manage investor capital legally on our exchange.

You can register for this webinar here.

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If you’d like to suggest any new topics, please add them to our UserVoice suggestions page.

 

The CHF blood bath, explained

17 January 2015

48 hours into the CHF debacle, it’s always healthy to carry out some post-mortem analysis to learn the lessons of why it happened, and what we could have been done to weather it better. Since we’ve done it, why not share it? The macro-story: Black-Wednesday, redux What happened is crystal-clear with the benefit of hindsight (as […]

48 hours into the CHF debacle, it’s always healthy to carry out some post-mortem analysis to learn the lessons of why it happened, and what we could have been done to weather it better.

Since we’ve done it, why not share it?

The macro-story: Black-Wednesday, redux

What happened is crystal-clear with the benefit of hindsight (as it always is).

The CHF is a currency safe-haven, albeit a rather illiquid one, since it’s only backed by a tiny and financially hypertrophic economy. Ever since the EUR crisis, everyone and their mother placed some of their safety net in CHF – so much so that the Swiss National Bank was forced to ¨intervene¨ to keep the level at 1.20 to the EUR.

The intervention mechanism was: whoever bought CHF close to 1.20 sold to one counterparty, and one counterparty alone – the SNB. In broker parlance, the SNB became the daddy of all market makers by being the only player in the market with “unlimited” access to CHF close to the 1.20 EUR/CHF cliff. This filled the balance sheet of the SNB with foreign currency reserves… above all with a boatload of EUR, for EUR area is the Swiss’ primary commercial partner and the home currency of nervous europeans who by now trust neither their “unbreakable” currency, nor their tax-agency (the latter being food for another post).

With the EUR crisis on its way back (it has never really left…), the EUR has gone on free-fall, and EUR reserves were drilling the daddy of all P&L hits in the SNB balance sheet. That was before Herr Jordan got Mario’s phone call kindly announcing QE. Herr Jordan’s press conference is (financial) history being written as we speak.

Black Wednesday on September 16th, 1992, George Soros hit the headlines. Actually, he didn’t until after the dust had settled.

On the January 15th Donnerstagsdebakel (made this up, but it’s fitting for Thursday is the day of Thor and Thunder, depending on the language you choose), someone else hit the Jackpot.

We don’t know the name of the winner yet: journalists are still chasing around for a name and a photo to head their scoop… but if you want an outline of his likely background, read on.

The (retail) micro-story: Dancing on a cliff

We (traders, brokers, broker-dealers, and dealers) went about our business, nonplussed.

Traders saw juicy price-action dynamics at that level, and brokers readily offered (leveraged!) trading access to the CHF. Again with hindsight, everyone was dancing on a cliff… not wondering too much what would happen if (actually, when) Hoover Dam fell.

Dancing-on-Glacier-Point-03

So far, all pretty standard, really.

The interesting (and sad) bit, and the one that has received the least early attention is that the Fall affected brokers (A-Book) and dealers (B-Book) in tragically different ways – just as you’d expect it, for brokers trade with customers and dealers trade against them.

This effect IS news, because what went belly up on Thursday is the capillary over-the-counter (OTC) system of broker-dealers that makes currencies flow world-wide.

a-book, aka involuntary (unprepared!) contingent market makers

The moment the previous market maker (the SNB) went on strike, Hover Dam fell and sent the EUR on free-fall against the CHF – which called the next market makers to action: customers short the CHF and their collateral posted with their agency-only brokers and Prime Brokers (we’re pure A-Book).

Once that was exhausted (the higher the leverage offered, the quicker), brokers’s and Prime Brokers’ stop-losses triggered, but there was no market, so the margin we had posted with our Prime Brokers was the market. We, a-book brokers became involuntary (and ill equipped) market makers of last resort, not against our retail customers, but our wholesale counterparties.

Technically we ran no risk since actually it was our customers shorting the CHF who got smacked. In practice, FXCM (and others!) now know better: you can’t hire an army of lawyers to track thousands of micro-debts because each debt is smaller than 30 min of lawyer fees.

So there you go.

If you’re looking for victims, you’ll find more than your fair share in the lines of pure agency Brokers and Prime-Brokers who catalysed spot foreign exchange flows between macro (Tier 1 Banks and Central Banks)market makers and micro (Hedge-Funds, retail traders, Tier 2 institutions) price takers.

b-book, unregulated retail bucket shops

The retail spot forex trading arena contains close to 1000 unregulated, undercapitalised, over-levered retail dealers (= bucket shops) who make markets against FX punters.

(How or why they are allowed to invest massive amounts into advertising to earn business in regulated markets escapes our understanding, but that’s for another blog post.)

More to the point, how did they fare? Just fine, thank you.

They kept the deposits of those short the CHF, as they always do – and they didn’t have any losses with wholesale counterparties to match (all they do is trade against customers, remember?).

So how about the winners? You can bet that many of those outfits will keep the P&L of winning customers (there was no market, re-quotes, blah-blah), as they always do. That’s when operating an unregulated casino comes in particularly handy.

So there you go.

If you’re looking for more victims, go find would have been genius… who discovered a tad too late that trading with an unregulated bucket shop is a variation on the age old “heads I win, tails, you lose” coin toss.

They could have been George Soros, but learnt the concept of counterparty risk instead.

Darwinex

We came out of this just fine, mainly because we did most things right, and partially because we were lucky.

What we did right was to anticipate the on-exchange move. We have been clearing all our flow with LMAX (a MiFID regulated MTF), partially because we think that there’s too much information asymmetry in OTC forex, partially because Exchanges facilitate clearing and settlement (go ask Saxo customers being re-quoted on their CHF trades), and generally because we think that on Exchange is the proper way of doing things.

We had minimal CHF exposure, both in absolute terms and in relative terms both to the bulk of our business and our capital base. We weren’t watching much (there was no need), took a tiny hit. 3-quarters design, 1 quarter luck, bottom line is we came out just fine, and a lot of our users are now migrating incremental funds to us, which is a great honor.

All in, this was the cheapest life-saving lesson we will ever learn. And you bet we’ve learnt it.

The road from here

It was probably going to happen, and the regulators were probably looking for a justification… and now they’ve got it.

The Spot currency exchange market is the biggest OTC market in the world. Because it’s also the oldest, it stayed OTC way after technology and common sense recommended the move on exchange. What held that back was the mess of having to put in place an alternative to the network of broker-dealers that kept currencies flowing, unknown to the general public and most of even informed people in finance . It was clunky alright, but it worked.

If anything blew last Thursday, it was the very internal pipes that kept the OTC foreign exchange market flowing. Tens of legitimate financial outfits will spend some time working out just how much they lost… others are simply gone. With the pipes gone, the regulatory ought to do do has become an urgency must do

If you have an opportunity to invest into a Multi-Lateral Trading facility that clears foreign currency, you can bet they’re going to be faceless big time winners of this, alongside the next George Soros. We, for one, have been trading with one because this bit we did see coming.

CHF – Business as usual

16 January 2015

George Soros broke the Bank of England on September 16th, 1992. Online trading wasn’t invented back then, so no retail dealers lost money betting against smart retail traders. January 15th, 2015 , those smart enough to smell blood when central bankers pledge to “enforce the minimum exchange rate with the utmost determination“, broke the Swiss National […]

George Soros broke the Bank of England on September 16th, 1992. Online trading wasn’t invented back then, so no retail dealers lost money betting against smart retail traders.
January 15th, 2015 , those smart enough to smell blood when central bankers pledge to “enforce the minimum exchange rate with the utmost determination“, broke the Swiss National Bank. By golly, it looks as though the CHF bloodbath is a day several household names in the FX dealer space will not forget.
Darwinex was business as (almost) usual. It wasn’t fully usual because we lost a negligible amount as some customers were margined out and there was no market for them (and therefore, us) to stop their (therefore, our) losses. Then again, broadly speaking, our policy of matching all trades on exchange paid off. Yesterday, like every-day, we were only exposed to negligible counterparty risk. Which means that any the P&L for any trades closed with us was binding, and we will NEVER e-mail a customer to re-quote  ANY trade. And since we’re an FCA regulated matched principal broker, YOUR P&L and account balance is in exactly the same privileged position.
If you don’t appreciate the value in that, go ask your friends trading with unregulated dealers.
Looking forward, retail FX will never be the same after this. Hopefully this is a lesson we all, including traders and brokers, but also regulators, learn from. In our humble opinion, the days of OTC (retail) forex are possibly counted.
For our part, we’re in the process of reviewing our leverage policy – we have always recommended to limit leverage,  but now realise we should have gone one step further.

If you want to go fast … go alone

2 January 2015

If you want to go far… go together. We won’t deliver on our mission to return markets to people by ourselves. But that’s actually great: because valued partners like 50 give us daily inspiration to keep up. Thank you 50, great to be in this with you. PS: looking for a trusted trading mentor, feel […]

If you want to go far… go together.

We won’t deliver on our mission to return markets to people by ourselves.

But that’s actually great: because valued partners like 50 give us daily inspiration to keep up.

Thank you 50, great to be in this with you.

PS:

looking for a trusted trading mentor, feel free to visit his blog or watch this video. 100% trader aligned, no market making sponsored BS here!

 

 

 

X-Mas 2014 Changes

23 December 2014

We’re introducing wide-ranging change to accommodate the gradual release of the investor platform in 2015, starting today. Trader related information As we  open up for investors, trader specific information will be restricted to users who either link an MT4 account or trade a Darwinex MT4 account. The reason for this is that DARWINs are intrinsically different from […]

We’re introducing wide-ranging change to accommodate the gradual release of the investor platform in 2015, starting today.

Trader related information

As we  open up for investors, trader specific information will be restricted to users who either link an MT4 account or trade a Darwinex MT4 account. The reason for this is that DARWINs are intrinsically different from the trading strategy they’re based on, and as such the detailed diagnostic of the trading strategy is  relevant in the context of a trader trying to increase the investability of his DARWIN, but not  much less so to a DARWIN investor.

Note: demo accounts will continue to enjoy basic diagnostics (return, risk, behaviour, etc.) but will not be diagnosed for Darwinex Investment Attributes (timing, discipline, scalability, etc.) going forward.

Investable DARWINS

The new performance standard is set by investors: going forward the only public information available to unlogged users will be investable DARWINs.

This means: only live, funded accounts traded with Darwinex will be accesible to investors. Demo accounts and live accounts not executed by us will not be displayed.

DARWINs list

Alpha investor platform testers wanted

The first batch of live investor user accounts will be allowed access to the platform from January onwards. More investors will be accepted on a first-come, first-served basis. If you want to contribute to the effort (and enjoy first-come access to some seriously sexy DARWINS), feel free to comment on this blog-post.

Stay tuned…

Because this is literally the tip of the coming ice-berg!

 

Benzinga FinTech Awards

13 December 2014

Thank you for all your support in this year’s Benzinga FinTech awards. So far we’re had over 150 votes, more than enough needed to get us through to the next round.  The competition is tough though, so please keep showing your support on the link below. As part of the competition, one of our co-founders Juan […]

Thank you for all your support in this year’s Benzinga FinTech awards. So far we’re had over 150 votes, more than enough needed to get us through to the next round.  The competition is tough though, so please keep showing your support on the link below.

As part of the competition, one of our co-founders Juan was interviewed by the president of Benzinga, Kyle Bazzy. Here’s the interview: