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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

Darwinex Trading Hours for the 2017 Christmas & New Year Holiday Period

15 December 2017

Christmas is around the corner! Please find below the Darwinex Trading Schedule for the 2017 Christmas and New Year Holiday Period (all times are displayed in UK time and changes to regular trading hours are highlighted in red).   Instrument    Friday 22nd Dec   Monday 25th Dec   Tuesday 26th Dec FX 22:01 Thu – 21:55 Fri CLOSED 22:01 Mon – […]

Christmas is around the corner!

Please find below the Darwinex Trading Schedule for the 2017 Christmas and New Year Holiday Period (all times are displayed in UK time and changes to regular trading hours are highlighted in red).

 

Instrument 

 

Friday 22nd Dec

 

Monday 25th Dec

 

Tuesday 26th Dec

FX 22:01 Thu – 21:55 Fri CLOSED 22:01 Mon – 22:00 Tue
Commodities
Gold 23:01 Thu – 21:55 Fri  CLOSED 23:01 Mon – 21:59 Tue
Silver 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
Platinum 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
Palladium 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
US Crude 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
US Natural Gas 23:00 Thu – 20:00 Fri  CLOSED 23:00 Mon – 22:00 Tue
DARWINS 23:00 Thu – 20:00 Fri CLOSED 22:00 Mon – 22:00 Tue
Indices      
STOXX50E 23:00 Thu – 21:55 Fri  CLOSED CLOSED
GDAXI 07:00 – 21:00   CLOSED  CLOSED
SPA35 07:00 – 19:00   CLOSED  CLOSED
SPX500 23:00 Thu – 21:55 Fri  CLOSED  CLOSED
WS30 23:00 Thu – 21:55 Fri  CLOSED  CLOSED
NDX 23:00 Thu – 21:55 Fri  CLOSED  CLOSED
J225  23:00 Thu – 21:55 Fri CLOSED CLOSED
AUS200 23:00 Thu – 05:30 Fri CLOSED CLOSED 
FCHI40  23:00 Thu – 21:55 Fri  CLOSED  CLOSED
UK100 23:00 Thu – 12:30 Fri  CLOSED  CLOSED 

 

 

Instrument 

 

Friday 29th Dec 

 

Monday 1st Jan 

 

Tuesday 2nd Jan

FX 22:01 Thu – 21:55 Fri CLOSED 22:01 Mon – 22:00 Tue
Commodities
Gold 23:01 Thu – 21:55 Fri  CLOSED 23:01 Mon – 21:59 Tue
Silver 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
Platinum 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
Palladium 23:00 Thu – 21:55 Fri  CLOSED 23:00 Mon – 22:00 Tue
US Crude 23:00 Thu – 20:00 Fri  CLOSED 23:00 Mon – 22:00 Tue
US Natural Gas 23:00 Thu – 20:00 Fri  CLOSED 23:00 Mon – 22:00 Tue
DARWINS*  22:05 Thu – 22:00 Fri  CLOSED 22:00 Mon – 22:00 Tue
Indices      
STOXX50E 23:00 Thu – 21:55 Fri CLOSED 23:00 Mon – 22:00 Tue
GDAXI 07:00 – 21:00  CLOSED  07:00 – 21:00 
SPA35 07:00 – 19:00  CLOSED 07:00 – 19:00 
SPX500 23:00 Thu – 21:55 Fri  CLOSED  23:00 Mon – 22:00 Tue
WS30 23:00 Thu – 21:55 Fri  CLOSED  23:00 Mon – 22:00 Tue
NDX 23:00 Thu – 21:55 Fri  CLOSED  23:00 Mon – 22:00 Tue
J225  23:00 Thu – 21:55 Fri CLOSED 23:00 Mon – 22:00 Tue
AUS200 23:00 Thu – 05:30 Fri CLOSED 23:00 Mon – 22:00 Tue
FCHI40  23:00 Thu – 21:55 Fri CLOSED 23:00 Mon – 22:00 Tue
UK100 23:00 Thu – 12:30 Fri  CLOSED  23:00 Mon – 22:00 Tue

As always, if you have any queries, please feel free to contact us at info@darwinex.com.

The Darwinex Team wishes you a Merry Xmas and a Happy New Year!

buho-navidad-darwinex-02

And the DarwinIA winners are… (November 2017)

1 December 2017

The November 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 Notional allocation 1st PUZ € 300,000.00 2nd AXF € 250,000.00 3rd STP € 210,000.00 4th CSP € 170,000.00 5th SVI € 150,000.00 6th […]

The November 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 Notional allocation
1st PUZ € 300,000.00
2nd AXF € 250,000.00
3rd STP € 210,000.00
4th CSP € 170,000.00
5th SVI € 150,000.00
6th WIZ € 140,000.00
7th TSB € 130,000.00
8th HTS € 120,000.00
9th XAX € 110,000.00
10th NTI € 110,000.00
11th LZB € 110,000.00
12th CLA € 100,000.00
13th TZR € 100,000.00
14th MAT € 100,000.00
15th DDY € 90,000.00
16th CEM € 90,000.00
17th YIA € 90,000.00
18th ERQ € 80,000.00
19th QUA € 80,000.00
20th EEE € 80,000.00
21st SQG € 70,000.00
22nd AGD € 70,000.00
23rd FOF € 70,000.00
24th FEG € 70,000.00
25th EKB € 60,000.00
26th DSM € 60,000.00
27th BOT € 60,000.00
28th FJD € 60,000.00
29th RDD € 60,000.00
30th HTX € 60,000.00
31st RIB € 50,000.00
32nd BFT € 50,000.00
33rd ONE € 50,000.00
34th FCQ € 50,000.00
35th GPZ € 50,000.00
36th YHN € 50,000.00
37th ZTY € 50,000.00
38th PFZ € 40,000.00
39th PFI € 40,000.00
40th BGO € 40,000.00
41st JCZ € 40,000.00
42nd GTD € 40,000.00
43rd MMG € 40,000.00
44th APG € 40,000.00
45th YEC € 30,000.00
46th RFQ € 30,000.00
47th DJO € 30,000.00
48th VTJ € 30,000.00

 

Have questions about DarwinIA trading challenge ? At info@darwinex.com we’ll be happy to assist you!

Amended Trading Hours for US Thanksgiving Holidays (23 and 24 November 2017)

21 November 2017

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 23 and 24 November 2017 (all times are in UK – GMT time).  Instrument 23 November 2017 24 November 2017 FX 22:01 Wed – 22:00 Thu 22:01 Thu – 21:55 Fri DARWINS 22:01 Wed – 22:00 Thu  22:01 Thu – 21:55 Fri  COMMODITIES     Gold* […]

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 23 and 24 November 2017 (all times are in UK – GMT time).

 Instrument 23 November 2017 24 November 2017
FX 22:01 Wed – 22:00 Thu 22:01 Thu – 21:55 Fri
DARWINS 22:01 Wed – 22:00 Thu  22:01 Thu – 21:55 Fri
 COMMODITIES    
Gold* 23:01 Wed – 17:59 Thu 23:01 Thu – 18:44 Fri
Silver* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:44 Fri
Platinum* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:44 Fri
Palladium* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:44 Fri
US Crude* 23:00 Wed – 17:44 Thu 23:00 Thu – 17:29 Fri
Natural Gas* 23:00 Wed – 17:44 Thu 23:00 Thu – 17:29 Fri
 INDICES    
Australia 200 23:00 Wed – 22:00 Thu 23:00 Thu – 21:55 Fri
 Europe 50 23:00 Wed – 22:00 Thu 23:00 Thu – 21:55 Fri
France 40 23:00 Wed – 22:00 Thu 23:00 Thu – 21:55 Fri
Germany 30 07:00 – 21:00 07:00 – 21:00
Spain 35 07:00 – 19:00 07:00 – 19:00
Japan 225* 23:00 Wed – 17:59 Thu  23:00 Thu – 18:14 Fri 
UK 100 23:00 Wed – 22:00 Thu 23:00 Thu – 21:55 Fri
 US SPX 500* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:14 Fri 
 US Tech 100* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:14 Fri 
Wall Street 30* 23:00 Wed – 17:59 Thu 23:00 Thu – 18:14 Fri 
*Amended Darwinex trading hours.

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

DARWIN conditional orders in live environment

14 November 2017

We have the pleasure to announce that we are finally rolling out DARWIN conditional orders in the live environment. Demand was so strong, this just couldn’t wait any longer! Conditional orders for live accounts The DARWIN Exchange now supports conditional orders in the live environment. Investors may now enter conditional orders so that when a […]

We have the pleasure to announce that we are finally rolling out DARWIN conditional orders in the live environment. Demand was so strong, this just couldn’t wait any longer!

Conditional orders for live accounts

The DARWIN Exchange now supports conditional orders in the live environment.

Investors may now enter conditional orders so that when a DARWIN quote:

  • Falls to a certain level, they buy it (Buy limit)
  • Rises to certain level, they buy it (Buy stop)
  • Falls to a certain level, they sell it (Stop Loss)
  • Rises to a certain level, they sell it (Take Profit)

NB: we’ve disabled Buy stops for now – we will activate them once everyone is comfortable with the other 3 limit order types.

 

In order to launch conditional orders in the live environment, we’ve also had to launch another much demanded feature – DARWIN candle charts.

Introducing DARWIN candle charts

We’re introducing candle charts, not for the purpose of charting, but to be as transparent as possible on whether DARWIN quotes hit a given level.

Candles represent a given time interval and have:

  • Opening quote: the first quote at the start of the interval represented by the candle
  • Closing quote: the last quote during the interval represented by the candle
  • High: highest quote in the interval
  • Low: lowest quote in the interval

Note that due to differences in the frequency of tick price movements and duration of candle periods, the close quote for a candle need not necessarily match the open quote for the succeeding candle.

Price granularity

Price granularity is a trade-off between accuracy/transparency and computational efficiency. Pick too little, and compromise transparency. Pick too much, and waste resources.

This is why we’ve opted for a 3-Tier approach:

  • Second level granularity: on quotes in the DARWIN platform since 15 August 2017
  • Minute granularity:  for the period between IPO/validation of the Darwin in question and the 15 August 2017
  • Hourly granularity: for the period pre Darwin IPO/validation, when there were no investors in the DARWIN. Transparency requirements are lowest – these are “fictitious” quotes that no investor experienced!
  • Exception on DARWIN re-sets: on occasions, owing to some execution issue on a DARWIN’s underlying strategy, DARWIN equity curves must be “simulated” back to what they would have been barring the execution issues. For the period where the curve has had to be re-created, or needs to be recreated in the future, granularity will be on an hourly basis (just like pre-IPO), and not on a minute/second basis as you would otherwise expect.

You might ask yourself, “Why only second level granularity from 15th August 2017?”. Well, it’s simple really. We simply didn’t think that we would need this level of detail.

Separately, we are aware that the treatment of exceptions is sub-optimal. Be assured however that there’s ongoing work both to minimise the probability of execution disruptions and to resolve the mismatch between the actual and “optimal” DARWIN equity curve. Unfortunately this is not a trivial issue, so it will take time to fix.

Drawdown calculation

We will continue to calculate Drawdowns off the “Return Chart”. Note that this still doesn’t reflect the “Min” Candle – we’re working  on fixing this. Meanwhile, we preferred to release the candles over waiting for ironing out all related issues.

Thank you for your understanding and we look forward to your feedback on how to improve the platform!

And the DarwinIA winners are…

1 November 2017

The October 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 Notional allocation 1st TKT € 300,000.00 2nd UYZ € 250,000.00 3rd ZXW € 210,000.00 4th DLF € 170,000.00 5th FEG € 150,000.00 6th […]

The October 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 Notional allocation
1st TKT € 300,000.00
2nd UYZ € 250,000.00
3rd ZXW € 210,000.00
4th DLF € 170,000.00
5th FEG € 150,000.00
6th VQB € 140,000.00
7th MOW € 130,000.00
8th HTS € 120,000.00
9th VTJ € 110,000.00
10th STP € 110,000.00
11th JCZ € 110,000.00
12th CLA € 100,000.00
13th LVS € 100,000.00
14th NWU € 100,000.00
15th PUL € 90,000.00
16th LDR € 90,000.00
17th PHD € 90,000.00
18th DFL € 80,000.00
19th AGD € 80,000.00
20th CNU € 80,000.00
21st KGL € 70,000.00
22nd PEW € 70,000.00
23rd KYQ € 70,000.00
24th AXF € 70,000.00
25th FGC € 60,000.00
26th QTN € 60,000.00
27th VNE € 60,000.00
28th ECC € 60,000.00
29th FYW € 60,000.00
30th PUD € 60,000.00
31st ERQ € 50,000.00
32nd DZL € 50,000.00
33rd PMZ € 50,000.00
34th BNX € 50,000.00
35th WBH € 50,000.00
36th LLZ € 50,000.00
37th FTT € 50,000.00
38th KWC € 40,000.00
39th OOG € 40,000.00
40th NGS € 40,000.00
41st SRK € 40,000.00
42nd XYP € 40,000.00
43rd NAU € 40,000.00
44th VHI € 40,000.00
45th ONE € 30,000.00
46th FER € 30,000.00
47th BYC € 30,000.00
48th PUZ € 30,000.00

Darwinex Amended Trading Hours due to German Public Holiday (31 October 2017)

27 October 2017

Please note the amended Darwinex trading hours for the upcoming Bank Holiday in Germany on 31 October 2017 (all times are in UK time).  Instrument Trading Hours  FX 22:05 Mon – 22:00 Tue   DARWINS 22:05 Mon – 22:00 Tue  COMMODITIES   Gold 23:00 Mon – 22:00 Tue Silver 23:00 Mon – 22:00 Tue Platinum 23:00 Mon – 22:00 […]

Please note the amended Darwinex trading hours for the upcoming Bank Holiday in Germany on 31 October 2017 (all times are in UK time).

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

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