From now on, DARWIN quotes will be calculated based on investors’ execution prices instead of the trader’s signal account execution prices, as they have been previously. We provide detailed information on this in another article on our blog.
In this post, however, we want to delve deeper into what the concept of divergence was, its main causes, and explain some of the discrepancies that will still exist between the DARWIN price and investor profitability.
Let’s review: What is divergence?
The DARWIN quote is a theoretical number calculated in real-time based on the prices of the underlying assets opened by the DARWIN, the execution prices of orders, and the volumes open in each asset. In other words, it has nothing to do with the dynamics of price generation in a quoted market; instead, its composition is much more similar to the quote of a stock index or an ETF.
Once its quote is constructed, there is a tool that seeks to provide that same return to investors who want to replicate the DARWIN index. At Darwinex, we refer to divergence as the difference in return that investors experience compared to the DARWIN quote, stemming from differences in the index calculation and the gains and losses of investors.
Main causes of divergence
The main cause of divergence is that investors, at times, may execute their trades in the market at a price different from the signal account’s price, which was the reference price used for calculating the DARWIN quote until now. This price difference is due to two main factors:
- The price difference arising from executing with a time delay compared to the trader’s execution in the Signal Account. This can be either positive or negative divergence.
- The main cause, stemming from trading with a higher volume in the market than the trader, which implies experiencing slippage in the execution price due to a lack of liquidity in the market. This is always negative divergence.
The reasons that led us to construct the index by taking the execution prices from the signal account were fundamentally technical, but it also allowed us to better break down the sources of profitability for both investors and the DARWIN provider.
We consider that simplicity should be prioritized when evaluating a DARWIN and the concept of divergence due to slippage has been challenging to grasp for many investors on the Darwinex platform. As a result, we will no longer use the concept of ‘divergence’ but instead we’ll introduce other terms that better explain some functionalities of our platform (more information in the article mentioned at the beginning of this post)
You should know that there will still be differences between investor returns and the DARWIN index, but they will always be random (sometimes in the favour of the investor and sometimes against them) and therefore of much less significance.
Sources of discrepancy between the DARWIN price and investor returns from now on
1. Due to an investor’s account using a different currency to that of the DARWINs:
If the investor and the DARWIN are calculated with different reference currencies, a random difference occurs between the quote and the investor’s investment result.
For example, if the DARWIN is calculated in USD and the investor has their portfolio in EUR, there will be a difference in the conversion of the P&L (profits and losses) of each trade to the reference currency. In a trade where the DARWIN gains, for example, 100 USD, the investor will gain 100 USD +/- the variation of EURUSD during the open period of that trade, applied to the 100 USD. This concept, which until now was also part of the discrepancies between investors and DARWIN, will continue to exist, and under normal conditions, it will be the most significant factor from now on. We call this concept “currency impact,” and it will be reflected in the investor’s portfolio moving forward.
2. Due to the commission and spread when buying the DARWIN:
Whenever a new investment is made in the DARWIN, the investor must pay the execution commission for the assets opened by the DARWIN, and additionally, they will “pay” the entry spread on the open assets, which typically averages around 0.025% against them. This is why the difference will always be negative at the time of buying a DARWIN.
3. Other sources of discrepancy:
There are other reasons that can generate discrepancies, such as those derived from rounding or execution issues in the market.
For example, if you buy a DARWIN that has an underlying asset whose quote is outside of trading hours, the investor will buy all the open assets and execute those that are closed when the market opens.
It can also happen that the trader opens a trade very close to the market’s closing and investors may not be able to execute that trade, having to wait for the market to reopen to open it. This creates a temporary discrepancy that will be resolved when the trade is executed by investors.
As mentioned at the beginning of this post, we have prepared a detailed article for you to understand the details of how DARWINs will be quoted from now on, along with the specific changes that have been implemented in the platform, which we invite you to read here.
Feel free to send us your questions and/or comments to info@darwinex.com, and we will be happy to assist you.
Thank you for reading,
Your Darwinex Team.