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Will Darwinex become a market maker?

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!

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!


  • RandomYoda
    Posted April 21, 2018 at 10:34 am

    Awesome update. Long story short; and, in summary:
    1. 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.
    2. 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.

  • Carlo Colombo
    Posted April 21, 2018 at 2:17 pm

    Why Darwinex should follow ESMA regulations being in UK?

    • Post Author
      The Market Owl
      Posted April 24, 2018 at 12:03 pm

      Dear Carlo, ESMA is the regulator for the entire EU – they run MiFid, and until Brexit, the UK is part of it. The UK may well be bound by it AFTER Brexit

  • Eckhard Müller
    Posted April 22, 2018 at 4:35 pm

    Very interesting. Thank you for this information.

  • Eric
    Posted April 23, 2018 at 11:50 am

    Hi, I still don’t get it. So soon you will be a market maker broker but route clients’ position to market?

    • Post Author
      The Market Owl
      Posted April 24, 2018 at 12:07 pm

      Eric, being single gives you technical “permission” to go after any girl you fancy. But you might perhaps choose to stay loyal to your girlfriend, even if you’re not bound by a marriage contract.
      Similarly, for us to continue providing YOU with access to the market, we MUST grant you a negative balance protection. This REQUIRES a regulatory license that gives us the OPTION, but not the OBLIGATION to make markets. We choose to continue to give you access to the market, and we choose NOT to make markets against you, which is to route 100% of the flow to the market.
      Does that help?

      • Anees Ahmed
        Posted April 28, 2018 at 8:31 am

        The intention of Darwinex is very genuine and clear. But negative balance protection will be a huge RISK for Darwinex if you continue providing retail client direct access to market. How do you intend to protect your shareholders then?

        • Post Author
          The Market Owl
          Posted May 7, 2018 at 6:59 pm

          Thanks for your comment and concern Anees Ahmed. The purpose of this article is to let our clients know that we need to change our brokerage licence in order to protect ALL OF YOU. As per our shareholders, this falls into private territory but be assured that our shareholders share our values. Regards

    • Post Author
      The Market Owl
      Posted April 24, 2018 at 12:34 pm

      Eric, one thing is to have a permission to make markets, and another is to choose to use that permission. So we will have permission to BE a market maker, but we have transparently 1) explained what forces us to get that permission (otherwise we CANNOT continue to do business with retail customers) and 2) explained that we CHOOSE to continue just the way we have operated to date. Does that make sense?

  • Jon Grah
    Posted April 30, 2018 at 6:55 pm

    It is possible to maintain an agency-only license AND provide negative balance protection….just continue doing what you are doing now. You can
    a) make the deal with the upline provider to provide rebates, or
    b) eat the loss yourself out of operating expenses. But you would have already increased margin call and margin stop out rates and in general leverage such that it would be UNLIKELY for a trader to be wrong and have negative balance.
    Perhaps a video or blog explaining how often do negative balances occur for clients and the reasons for it. It is likely overleveraging which will be curtailed. Even if the regulator did not demand lower leverage, it does not stop the broker from voluntarily providing lower leverage.
    This is what all true Prime Brokerages and Prime of Prime brokerages already do.

    • Post Author
      The Market Owl
      Posted May 7, 2018 at 7:07 pm

      Thank you very much for you input Jon Grah! We have given a lot of thought and finally decided to opt for the licence change although we do plan to keep routing ALL our orders to the market. As per your question about the frequency of negative balance instances in Darwinex. Very few of them actually. Most of them during the GBP flash crash and the CHF fiasco. Best

  • SirLanka
    Posted November 17, 2022 at 12:24 pm

    I would like to know why you didn’t chose the option in which you don’t have the market maker license and still can operate under the European regulation.

    Was it really the only option?

    I mean, other brokers also faced the difficult situation to chose what to do, but have chosen to just not be tempted by the market maker license, and they are safe and sound operating under the European regulation and offering negative balance protection.

    Thanks for the response in advance.

    • SirLanka
      Posted November 17, 2022 at 1:06 pm

      Also to avoid repeated answers from other comments I will clarify my question.

      Why do you say that otherwise (if not having this license) you cannot do business with retail customers?

      Your transparent explanation isn’t really that clear and it doesn’t help if we compare it with other brokers that are fully non dealing desk and don’t have a market maker license while still operating and doing business with retail investors within the Europe and its regulations.

      Sorry in advance if my comments seem like an attack but I don’t want to advertise or promote any broker, I just really wanted to try out darwinex and that’s when I saw this post and all seems very honest and that but some things are missing and that is a headache, just trying to get some clarification.
      Thanks for your comprehension.

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The Darwinex® brand and the domain are commercial names used by Tradeslide Trading Tech Limited, a company regulated by the Financial Conduct Authority (FCA) in the United Kingdom with FRN 586466, with company registration number 08061368 and registered office in Acre House, 11-15 William Road, London NW1 3ER, UK. and by Sapiens Markets EU Sociedad de Valores SA, a company regulated by the Comisión Nacional del Mercado de Valores (CNMV) in Spain under the number 311, with CIF A10537348 and registered office in Calle de Recoletos, 19, Bajo, 28001 Madrid, Spain.

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