Why Darwinex is the DARWIN Exchange

2 November 2017
The Market Owl

Why we are the Darwin Exchange

When first trying to understand the DARWIN Exchange, Investors often ask questions like:

  • How does Darwinex filter for trader quality?
  • Which DARWIN / Trader should I back?
  • How many traders make up an ideal portfolio?

Our answer is: we are the Darwin Exchange. We don’t curate traders, and we don’t recommend strategies to pick or combine them. 

Our Exchange bet is a conscious one – it stems directly from the “by traders, for traders” vision. In this post we elaborate why.

Why Exchange – and not Hedge Fund?

We bet that independent traders are an asset class. If independent traders are worth listing, our success hinges on offering top trading talent the best possible deal.

DARWIN Exchange matches traders with investors

Independent traders and savvy investors already exist – it’s all about aligning the matching process!

That deal boils down to:

  • The most investor capital, for…
  • The highest (sustainable) success fee, with…
  • The least (time and money) overhead

What’s the proven model to match scarce supply for an asset (good traders) with demand?

You guessed: an Exchange.

That’s why work to create a neutral venue, matching trader supply with investor demand. And we do it because once it gets up to speed, we will all (traders, Darwinex and investors) leverage trader-investor network effects.

What if Darwinex weren’t neutral?

Another way to look at it is to think of it the other way around.

What if we weren’t the DARWIN Exchange, but the DARWIN Hedge Fund?

What if we:

  1. Filtered for trader quality?
  2. Advised on DARWINs, or even
  3. Built DARWIN portfolios?

First – the filtering.

We could deny “low quality” trader A (a customer with our brokerage), the right to list a DARWIN. But then, we’d deny aspiring traders an option to benchmark themselves against investable ones. This would in turn:

  • Lose us brokerage business,
  • Lower our revenue, hence
  • Slow down the development roadmap, by
  • Worsening trader & investor execution conditions,
  • Thus reduce success fees paid to the best traders,
  • And therefore reduce our attractiveness with (particularly, the best) traders,
  • Lure investors away from remaining traders

… and so defeat the vision.

Second – why not recommend DARWINs?

We charge traders and investors volume commissions. If we did recommend DARWINs, how could we credibly convince investors – and traders! – that we don’t prioritise high rotation strategies?

(Note that we share our own proprietary investor experience via DarwinexLabs. However we do this to share our learning curve transparently, not to provide expert advice – because there’s no “experts” in a new asset class!)

In the long run, we think that the trader Exchange model beats 1-sided models:

  • Broker only (trader supply) and/or
  • Asset manager (investor demand).

Yet all the above only accounts for “known” knowns.

What about network effects ?

What about unknown-unknowns?

Well matched marketplaces trigger network effects: powerful unknown-unknowns.

We target a setup where:

  • The more (and better) the traders, the higher the investor appeal
  • The more investor capital, the higher the appeal to traders

By remaining neutral and open, we foster an ecosystem attractive to:

  • Asset managers: nothing would please us more than a future where professional capital allocators create “DARWIN Funds”, or
  • Trading academies: educate students on acing the D-Score and landing investor capital,
  • … other ideas we can’t even think of at the moment

To date, nothing makes us prouder than hosting, in addition to the above:

  • Investor clubs – with members exchanging ideas on which DARWINs to back
  • Algo-developers scraping the DARWIN price feed to create EAs on DARWINs,
  • Traders backing their DARWIN (instead of their MT4 account), leveraging the Risk Manager software

Last, but not least…

…. we are the Darwin Exchange because we want fairer markets, and a fairer world.

Fair implies equality of opportunity. For traders, as well as for investors.

This is the reason we keep our minimum account sizes deliberately low. We know some of our smallest traders actually cost us money, but we believe in giving opportunities to young students who start their trading journey.

Open is equally important for investors. Humanity has never had it better at any time in history, but we are worried by growing inequality. This particularly applies to how people save and invest: the well off can access investment products unavailable to the common man because the common man isn’t well off.

This is socially dangerous. It means  a world where the more you own to begin with, the better % investment returns you make. Which in a nutshell means: the more unequal the world starts, the more unequal it becomes.

That’s the last reason why we’re an open exchange where every customer can invest in any of the products on offer. Because we don’t want the whole world belonging to the owners of the highest performing hedge fund.