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Retail forex trading to be banned in Europe?

23 August 2016

Last week saw a potentially momentous move by a European regulator – the Belgian market authority banned  the distribution of some OTC derivatives to retail counterparties. The move is likely not to stay isolated. ESMA, the pan-european regulator has recently issued yet another warning. The regulatory radar has firmly focused on the sector – with trends in the US pointing in a similar direction.

In effect, Belgian’s move might be a first in a movement to gradually ban OTC trading of binary options, spot forex contracts and CFDs (Contracts for differences). We have received a lot of customer questions asking how this affects Darwinex. This blog post outlines why we think it was about time that regulators stepped in, and why it validates many of the structural choices we’ve made in servicing the independent trader movement.

Why retail forex OTC is wrong …

An OTC contract allows two counterparties to trade with each other in conditions that both adhere to. It has the potential benefit that anything can be traded, provided both parties agree to it. It can work well between evenly capitalised and knowledgeable parties (e.g. UBS and GS) – although one wonders if even institutions understand the economics behind the clauses they sign.

Offer OTC trading to retail customers (e.g. remove the “equally capitalised and knowledgeable” provision), and OTC means trouble. Take, for instance, a retail broker-dealer, advertising the following bet to any novice retail trader:

  1. Bet on the “price of the EURUSD” as published (e.g. SET) defined by the dealer
  2. The retail broker-dealer and the retail trader agree to settle the differences in the price set by the dealer
  3. The broker-dealer throws in the bonus option of multiplying any movement in the underlying up to 500 times – which can greatly amplify the wins! (and the losses)

Screen Shot 2016-08-23 at 12.50.37

We know where this ends: retail investors losing their shirts. Note: the blame doesn’t only lie with the broker-dealer, he didn’t impose the 500:1 leverage choice on the trader – greed and ignorance did. Having said that, there are 2 RED flags in the above set-up:

  1. A retail-dealer’s business model largely is pocketing the losses greatly compromises its incentives.
  2. A retail-dealer sets the price of the underlying – e.g. it’s both a player betting its own capital and a referee in the same game.

Not saying that all dealers incentivise their customers to do silly things – but given how profitable the above meat grinder is, is it realistic to expect them to stop customers blow themselves up?

There you go. That’s why the Belgian ban is likely not to be the last we hear on the topic. It only took 10 years, but the good news is:

  1. Regulators have finally stepped in
  2. The alternative solution has long existed (we’ve offered it all along!)
  3. We’ll (Darwinex) stop feeling like fools for doing the right thing and losing out to morally loose competition

… And why retail OTC is obsolete

If you think this problem is new, think again. This has happened every time a new investment opportunity came up.

The solution has long existed. It is to create a “marketplace” – commonly referred to as “Exchange” for financial instruments. Rather than trade bilaterally (pairwise) with bespoke (OTC) conditions with each other, a new central counterparty (CCP) is created, that trades a single standardised contract acting as the middleman that anonymously connects all participants with each other. Read this to understand the difference. This levels the playing field in a way that makes it structurally impossible for anyone party to abuse the market without making itself vulnerable to arbitrage.

There is one situation in which marketplaces don’t work well: with non-standard contracts. Without critical mass in liquidity, it’s too difficult to make a marketplace work, and in that situation market makers are probably better suited than a central counterparty. This is the reason why retail forex trading started OTC: even though no asset is more plain vanilla than spot foreign exchange, 10-15 years ago 1) it wasn’t possible to trade micro-lots in the interbank market, 2) there weren’t as many retail market participants as there are today.

Fast forward to today, and the restrictions are gone. You can trade micro-lots with Goldman Sachs on a marketplace / Exchange. Betfair founded LMAX, the first MiFID compliant multilateral trading facility (MTF) for foreign exchange and CFDs. We have been with LMAX from our very beginning because a) we think it’s the right way and b) we didn’t want to be caught off-guard when regulators (finally) acted.

Why the ban doesn’t affect Darwinex, now or going forward

We have consciously chosen to:

  1. Align ourselves with traders by
    1. Operate a matched principal model. We are a pure broker that trades with customers. We gain NOTHING when customers lose.
    2. Offering a platform allowing traders to legally scale their strategies with investor monies – removing their structural need to over-leverage
  2. Offer unique technology & tools to
    1. Inform traders, amongst others, of the risk (Value at Risk) in their strategies
    2. Protect investors when markets become riskier or traders over-leverage
  3. Trade on Exchange – by sourcing
    1. All of our CFD offering from a regulated Multilateral trading facility – e.g. Darwinex CFDs are NOT OTC.
    2. Part of our FX flow from a regulated Multilateral trading facility – e.g. part of our FX flow is NOT OTC

Furthermore, this is the reason why we’ll soon be offering Futures trading – we’ve simply had it with the stigma condemning even the clean guys in the forex sector.

The only reason we don’t source all our FX flow from LMAX Exchange is that LMAX suffers (and will suffer) from adverse selection until the ban spreads beyond Belgium. Because it doesn’t tolerate last look by LPs, and because it allows any participant (e.g. it doesn’t ban winning traders, regardless of strategies), it has historically been less competitive on raw spread comparisons – LPs offer wider spreads to protect themselves from winning traders, who tend to concentrate with LMAX once they’re banned by retail dealers.

Put it another way: a casino admitting winners offers worse (and worsening!) odds than casinos banning winners. Being as competitive price-wise as possible, together with the need to have a backup provider, is the reason why we partially aggregate liquidity from other parties on an OTC basis. If the regulatory push to trade on Exchange goes Europe (or world) – wide, we will continue servicing customers – this time without the commercial penalty we incur for NOT pocketing their losses.

In other words: rest assured that once this healthy regulatory movement comes full circle, both the independent trader movement and Darwinex will benefit even more from being structurally aligned for profit exchange. Please do not hesitate to highlight points that warrant further clarification – as this post will likely attract long term readership 🙂

 

Last News

High volatility expected due to RBNZ Interest Rate decision today

21 June 2017

The Reserve Bank of New Zealand is releasing its Interest Rate Decision today (21 June 2017) at 21:00 GMT. As you may recall, trading is disabled from 20:59:59 to 21:01:00 GMT due to the low liquidity available on rollover, so please bear in mind that you won’t be able to open / close trades from […]

The Reserve Bank of New Zealand is releasing its Interest Rate Decision today (21 June 2017) at 21:00 GMT.

As you may recall, trading is disabled from 20:59:59 to 21:01:00 GMT due to the low liquidity available on rollover, so please bear in mind that you won’t be able to open / close trades from 20:59:59 to 21:01:00 GMT during this volatile news release.

When setting your SL / TP, kindly note that large gaps are expected when trading resumes at 21:01:00 GMT.

Please do not hesitate to contact us at info@darwinex.com should you need assistance.

Darwinex at Forex Day 2017

19 June 2017

In what is becoming a tradition, this year we again were in attendance at The ForexDay on 9th-10th June in Madrid. As in previous years, the event lasted for two days: on the first day (Friday 9th June), the organisers gave a trading course (for a fee) which ended with an international trading contest. On […]

In what is becoming a tradition, this year we again were in attendance at The ForexDay on 9th-10th June in Madrid.

As in previous years, the event lasted for two days: on the first day (Friday 9th June), the organisers gave a trading course (for a fee) which ended with an international trading contest. On the second day (Saturday 10th June), there were presentations about trading on two stages in the Official College of Architexts in Madrid, Spain (you can see the event programme here).

International trading contest (9th June)

This year, the international trading contest participants were Rob Hoffman, Davide Biocchi and Tarek Elmarhri. As well as being a great trader, Tarek is the Darwinex Ambassador for France, so you can imagine who we were rooting for…and as the good trader that he is there are no prizes for guessing who won 😉

And the winner is… Tarek, of course!You can see an interview with Tarek here (apologies for the poor sound quality).

General Public Event (10th June)

On Saturday, at 9 am, the doors opened for the general public event.  As in previous years, we were surprised by the amount of people queuing at the door to attend the event.  From Darwinex we want to congratulate the organisers for how well everything turned out.

The Trading Conferences soon got underway on the stages, including the conference that we had prepared.

Darwinex Conference (Expo Stage)

At 12.30 am the first Darwinex conference took place: ‘Independent trader experiences – their day-to-day trading’, in the which Mallku, Riddick and Mimago shared their experiences as traders (with their proven track records).

Mallku, Riddick and Mimago on stage

 

As can be seen in the photos, the room was filled to capacity… we actually had to leave the stage without answering all the questions so the next speakers did not run out of time! You can see a video of the conference here (NB: the conference starts at 2:19.40).

At Darwinex, we wish to thank all those in attendance because it was a pleasure to have you all there!

Darwinex Conference (International  Stage)

Following on the success of the conference in the Expo Stage, we then held another Darwinex Conference in the Sala Panorámica. As the in previous conference, the theme was ‘Independent trader experiences – their day-to-day trading’. This time the guest speakers were Integracore2, VPSEnry, ChicksFX and Mallku. Once again the Conference was a success and many of those in the audience approached out stand to ask us about Darwinex, DARWINs, DarwinIA, etc.

You can watch a recording of the conference here.

Also, you can watch interview carried out by ForexDay with some of the participants on their Youtube channel.

Event Highlights

Having come this far, it is fair to say that the event was a success: Tarek won the international trading contest, the conferences offered by our traders filled to capacity both halls (the conferences ended up with standing room only due to such a high attendance!)

Nevertheless, this does not explain why the event was such a big success for us: what really put such a big smile on our faces that day was all the traders and investors that visited us at our stand: as well as Mallku, Riddick, Mimago, Integracore2, VPSEnry and ChicksFX, who were in attendance as guest speakers, we had the enormous please of speaking with Yofxtrader, ElQuantitativo, Chema01, MCFD, Pedroml and GlobalMarkets, amongst many others. We offer you all our most sincere thanks. We attended ForexDay in 2013 as guest and we never could have imagined the amount of great traders (and great people) that would end up becoming part of this traders’ movement a few years later… and the best is yet to come!

SEE YOU NEXT TIME!

PS: According to our friends the best part of the day were the post-event drinks! 

Volatility expected due to UK general election

7 June 2017

Please note that high volatility is expected on GBP, EUR, CHF pairs as well as on UK and European indices on Thursday (8 June 2017) due to the UK general election. Also, liquidity providers are expected to significantly limit their liquidity, which can give rise to abnormal widening of spreads, potential increased amounts of slippage on executed orders and, eventually, […]

Please note that high volatility is expected on GBP, EUR, CHF pairs as well as on UK and European indices on Thursday (8 June 2017) due to the UK general election. Also, liquidity providers are expected to significantly limit their liquidity, which can give rise to abnormal widening of spreads, potential increased amounts of slippage on executed orders and, eventually, gaps in the charts due to the low liquidity available. If you plan to keep open trades on Thursday, please make sure you post margin / equity in your account ahead as volatility is expected to increase, especially around market close at 22:00 (UK time) on Thursday.

We reserve the right to change our margin requirements as we move closer to the election / depending on the outcome. Should we decide to introduce any changes to our trading conditions, we’ll endeavour to contact you via email, MT4 or by changes made to our blog / website ASAP.

D-Leverage & Risk Manager

Further, our Risk Manager will be more restrictive when replicating DARWINS’ trades to protect investors from increased volatility owed to the election.

As always, please do not hesitate to contact us at info@darwinex.com for support.

And the DarwinIA winners are…

5 June 2017

The May edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period. Place DARWIN May’s notional allocation 1st XIN € 300,000.00 2nd GTD € 250,000.00 3rd DZT € 210,000.00 4th WEF € 170,000.00 5th KVL € 150,000.00 6th PUZ € […]

The May edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period.

Place DARWIN May’s notional allocation
1st XIN € 300,000.00
2nd GTD € 250,000.00
3rd DZT € 210,000.00
4th WEF € 170,000.00
5th KVL € 150,000.00
6th PUZ € 140,000.00
7th SVI € 130,000.00
8th ERQ € 120,000.00
9th NTI € 110,000.00
10th TOP € 110,000.00
11th OLT € 110,000.00
12th LVS € 100,000.00
13th RWL € 100,000.00
14th VTJ € 100,000.00
15th CLA € 90,000.00
16th VQG € 90,000.00
17th STM € 90,000.00
18th YMK € 80,000.00
19th THA € 80,000.00
20th MLS € 80,000.00
21st YHN € 70,000.00
22nd FTA € 70,000.00
23rd WZG € 70,000.00
24th FCQ € 70,000.00
25th SSS € 60,000.00
26th MDI € 60,000.00
27th VLR € 60,000.00
28th NND € 60,000.00
29th QNR € 60,000.00
30th OPK € 60,000.00
31st UEI € 50,000.00
32nd JMW € 50,000.00
33rd KDU € 50,000.00
34th FTT € 50,000.00
35th DLF € 50,000.00
36th VHI € 50,000.00
37th RSR € 50,000.00
38th XGU € 40,000.00
39th VFL € 40,000.00
40th WPQ € 40,000.00
41st VQB € 40,000.00
42nd FGC € 40,000.00
43rd XXW € 40,000.00
44th CSP € 40,000.00
45th MRV € 30,000.00
46th XYP € 30,000.00
47th PFH € 30,000.00
48th RQH € 30,000.00

Darwinex Trading Hours for ucomping Bank Holiday in Australia (12 June 2017)

Please note the amended Darwinex trading hours for the upcoming Bank Holiday in Australia on 12 June 2017 (all times are in UK time).  Instrument Trading Hours  FX 22:05 Sun – 22:00 Mon   DARWINS 22:05 Sun – 22:00 Mon  COMMODITIES   Gold 23:00 Sun – 22:00 Mon Silver 23:00 Sun – 22:00 Mon Platinum 23:00 Sun – 22:00 Mon Palladium 23:00 Sun – 22:00 Mon US Crude 23:00 […]

Please note the amended Darwinex trading hours for the upcoming Bank Holiday in Australia on 12 June 2017 (all times are in UK time).

 Instrument Trading Hours
 FX 22:05 Sun – 22:00 Mon
  DARWINS 22:05 Sun – 22:00 Mon
 COMMODITIES  
Gold 23:00 Sun – 22:00 Mon
Silver 23:00 Sun – 22:00 Mon
Platinum 23:00 Sun – 22:00 Mon
Palladium 23:00 Sun – 22:00 Mon
US Crude 23:00 Sun – 22:00 Mon
Natural Gas 23:00 Sun – 22:00 Mon
 INDICES  
Australia 200* 08:10 – 22:00
 Europe 50 23:00 Sun – 22:00 Mon
France 40 23:00 Sun – 22:00 Mon
Germany 30 07:00 – 21:00
Spain 35 08:00 – 19:00
Japan 225 23:00 Sun – 22:00 Mon
 UK 100 23:00 Sun – 22:00 Mon
 US SPX 500 23:00 Sun – 22:00 Mon
 US Tech 100 23:00 Sun – 22:00 Mon
Wall Street 30 23:00 Sun – 22:00 Mon
*Amended Darwinex trading hours.

As always, at info@darwinex.com we’ll be happy to assist you!

And the DarwinIA winners are…

3 May 2017

The April edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period. Place DARWIN April notional allocation 1st XXW € 300,000.00 2nd DOF € 250,000.00 3rd DLF € 210,000.00 4th XFL € 170,000.00 5th JMW € 150,000.00 6th VNE € […]

The April edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period.

Place DARWIN April notional allocation
1st XXW € 300,000.00
2nd DOF € 250,000.00
3rd DLF € 210,000.00
4th XFL € 170,000.00
5th JMW € 150,000.00
6th VNE € 140,000.00
7th CJN € 130,000.00
8th GPZ € 120,000.00
9th WIZ € 110,000.00
10th CLA € 110,000.00
11th SVI € 110,000.00
12th BFT € 100,000.00
13th BUE € 100,000.00
14th KVL € 100,000.00
15th QTN € 90,000.00
16th UEI € 90,000.00
17th SPI € 90,000.00
18th WFJ € 80,000.00
19th DNA € 80,000.00
20th YMK € 80,000.00
21st VTJ € 70,000.00
22nd PMZ € 70,000.00
23rd FSX € 70,000.00
24th XIN € 70,000.00
25th PGH € 60,000.00
26th OLT € 60,000.00
27th PIJ € 60,000.00
28th NTI € 60,000.00
29th DZL € 60,000.00
30th SSS € 60,000.00
31st ERQ € 50,000.00
32nd JKT € 50,000.00
33rd YYZ € 50,000.00
34th XGU € 50,000.00
35th GYL € 50,000.00
36th YVG € 50,000.00
37th CSP € 50,000.00
38th DZT € 40,000.00
39th LCA € 40,000.00
40th ADX € 40,000.00
41st CKV € 40,000.00
42nd THA € 40,000.00
43rd LSC € 40,000.00
44th RDD € 40,000.00
45th YZF € 30,000.00
46th VFL € 30,000.00
47th WPQ € 30,000.00
48th GPF € 30,000.00

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