Inside Forex – Darwinex DMA explained

28 January 2015
Juan Colon

As a trader, you can choose to place your bets with:

  1. A broker – who trades with you, against an independent 3rd party (“the market”). This is what Darwinex does and always will do. In brokerage jargon, brokers operate an A-Book
  2. A dealer – who trades against you and thus plays the role of “the market”
  3. A broker-dealer, who can act in either of the above capacities

In technical jargon, dealers and broker-dealers incur risk by running a so called a B-Book. You can watch our take on economics & incentives for either of the models in this webinar.

More interesting to you is the answer to “What does Darwinex DMA mean, and what happens to my trade after I hit trade on Darwinex MT4” – so let’s go for it!

MT4 B-Book

Out of the box, MT4 is a dealing platform: it is exclusively designed for a dealer to make markets against customers, by publishing a bid-ask price, on which customers may decide to trade.

If you e.g. go long 1 lot the EURUSD, MT4 processes:

  1. Your buy at the ask
  2. If the dealer accepts the opposite side of your trade, an accounting entry into the dealer’s B-Book at the bid is processed

Your trade’s P&L is a function of the evolution of (the dealer’s!) price-feed.

Technically though, it’s a simple bean-counting affair involving only MT4:

  1. You routed a trade request via the Internet in MT4 proprietary encoding
  2. MT4 received it
  3. The broker chose to fill you (or did not, in which you’d get a re-quote)
  4. You received a notification on your MT4 terminal

MT4 Direct Market Access

Things become slightly more involved in a pure A-Book broker – see chart below.

LMAX_Trade_Latency

In a nutshell:

  1. You routed a trade request via the Internet in MT4 proprietary encoding
  2. MT4 received it (no change so far)
  3. A software “bridge” triggered a FIX message to a 3rd party – we use this external provider for this
  4. The 3rd party determined the market price is, at arms’ length from Darwinex within 4 ms or less, as described in the diagram.

Crucially, and differently from most other brokers out there, Darwinex currently matches all your orders with LMAX in London, a MiFID regulated Multi-Lateral-Facility (MTF) to ensure that:

  1. All customers trade on one and the same price feed, resulting from an order-matching process that works on public and FCA enforced rules
  2. Customer identity remains anonymous – so winners are co-mingled with the rest of our flow and not discriminated against
  3. Liquidity providers enjoy no “last-look” on any orders fed into the order-book. This means you will NEVER experience a re-quote
  4. Counterparty risk is kept to a minimum – by virtue of only Tier 1 liquidity providers feeding prices in, and risk among liquidity takers being evenly spread

These are the reasons why we strongly believe in trading with customers, on Exchange. If the CHF affair and the FX rate rigging affair trigger anything, we bet it’s regulators accelerating the move of spot foreign exchange trading away from OTC, onto Exchanges.

MT4 & DMA – limitations

Alas, whilst on Exchange is the fair way, this is not to say that LMAX is without practical limitations owing to:

  • Adverse selection
  • MT4 Integration with the order book
  • (At times, and on certain pairs) Market depth

We’re more committed to providing customers with competitive liquidity in all market environments, than we are to fostering on Exchange clearing…. and we’ll provide more background on all the above in due course – for the time please note that we’re evaluating all possible options to mitigate the above limitations as widely and promptly as possible.