Will Darwinex become a market maker?

19 April 2018
The Market Owl

ESMA’s intervention puts Darwinex in the situation of applying for a market maker license. What does this mean for the members of the Independent Trader Movement? Read our founders’ letter to Movement Members.


Dear Movement Member,

As you know, ESMA has recently focused on the European CFD sector:

  1. Calling for evidence on a set of proposed measures
  2. Largely confirming the announced set of measures.

We contributed to the call for evidence, and announced our strategy in light of the now firm announcement. The latter blog post included a sentence (towards the end) which read:

Darwinex will formally graduate from broker to full-blown broker-dealer, and continue to drive trader evolution in just the same way as for the last 6 years.

Many of you have questioned what “formally graduate from broker to full-blown broker-dealer” means. Some even put it more bluntly: Darwinex becomes a market maker!

Will Darwinex become a market maker?

So, apologies that it got to this -we should have crafted our words more clearly- which is why we’re adding this clarification.

The vision test

When we face important decisions, we run the vision test. Is doing X the right thing according to the vision? So, is becoming a market maker in line with the vision?

Darwinex: “Home to traders”

We are where traders* enjoy equal and maximum opportunity to compete on merit alone.

*Trader = he/she who invests effort, in addition to capital, into the markets.

So: will Darwinex become a market maker?

The key to answer is the bit that reads – equal opportunity / competing on merit only.

If we risked Darwinex shareholder capital making markets for customers, protecting our shareholders would conflict with some of our customers. That is because we would have to selectively adjust our treatment of consistently:

  1. Losing traders – these traders would be a profit source for our shareholders
  2. Winning traders – for these traders would be a cost to our shareholders

And treating customers differently wouldn’t amount to equal opportunity. So no, making markets for customers, in the liquid markets we operate, carries a conflict of interest that would require an Exchange to arbitrate. That’s why we argued that ESMA should have forced CFDs on exchange, and why we think ESMA missed an opportunity.

B-Booking firms argue that this is not a conflict… and in the short term they’re right. At time 0 all that happens is that losers grow winners’ accounts. The catch is that at some point, the poker table runs out of suckers – and the game needs “market-makers” to take the other side of winners trades. Somebody has to bring new suckers in the game.

Here’s the conflict:

  1. If the market maker pays ads / IBs for attracting suckers, he must retain exclusive right to take the other side of their trades – pocket their consistent losses. Otherwise it’s an NGO, not a market maker,
  2. If the market-maker doesn’t pay for attracting suckers, there’s no suckers on the other side of the winners, so winners have no-one to win against.

You see, you can’t defy gravity in physics or in finance… and you can’t treat winners and losers differently without contradicting the vision. So that’s it: our shareholders will never deploy capital at a conflict with winning or losing traders.

That is the only way to remain fully aligned with DARWIN Exchange users, and that’s why our shareholders will never operate a market maker.

From broker to broker-dealer

So what about this “formally graduate from broker to full-blown broker-dealer”?

Well the fact is that regulatory change put us in a position where we must choose between:

  1. Operating on our current broker only permission – which is incompatible with the regulatory requirement to offer negative balance protection to retail traders
  2. Offering retail traders negative balance protection – which requires us to run some market risk, which in turn is incompatible with our current broker only license

So there is really no choice.

It’s either change the license or cease offering CFDs to retail customers. And again, using our definition of a trader -“he/she who invests time and effort, in addition to capital, into capital markets”- 99+% of traders & investors are retail. We have never considered this to be sufficient reason to lock them out of the market -not all lose money, remember- which is precisely what ESMA is inadvertently risking with this regulation.

So there you go. Option 2 -“becoming a full-blown broker-dealer”- is the only one consistent with our vision -Darwinex as a venue where traders enjoy equal and maximum opportunity to compete on merit alone- and the new regulation.

So that’s exactly what we meant. We become a full blown broker-dealer because we will always align our shareholders with our customers – and that includes carrying the required regulatory licenses. To put it another way: enjoying the full permission is a prerequisite to pursue our vision exactly as before the regulatory change… bar the change in permission.

What changes then?

The first change should by now be clear. Our set of regulatory permissions.

In the short run, that’s it. Holding a broker-dealer license gives us permission to “make a market”, but it imposes no obligation to do so. We will continue to route 100% of the flow directly to the market, the way we have for every order to date.

Ah, that’s the catch! That’s what you’ll do in the short run, but then you’ll sneakily become a market-maker once the dust settles!

No, you see, that would amount to reneging one of our core values (yes, we’ve got those, too). It’s “transparency”, and to say one thing, then do the opposite is a clear violation of that value. Because transparency has been a core value all along, we offer a section providing full order execution transparency.

In the medium term, providing traders with maximum opportunity requires additional changes. We will continue disrupting over-the-counter (OTC) trading, and the new license is a stepping stone in that direction. But more on that when the time comes. Which won’t be for some time to come. And yes, we will publish a blog post and do a webinar on that. The way we have always done. And the way we always will.

Juan Colón – Chief Evangelizing Officer (CEO)
Javier Colón – Chief Product Officer (CPO)
Miguel Ángel González – Chief Technology Officer (CTO)

Independent Trader Movement members since 2012


Questions? Comments? We would be honoured to take any on the comments section below!