New Chart: Evolution of Divergence

9 October 2018
Javier Colón

As you may already have noticed, we’ve launched a new feature recently that both DARWIN providers and investors will find useful.

Until now, values for only the average monthly divergence and latency were displayed on a DARWIN’s listing.

This latest update now also enables you to visualize the evolution of divergence over time.


What is divergence?


Why is displaying the evolution of divergence necessary?

Divergence calculations as they’re currently done, attempt to measure the type of divergence that’s due to the limited capacity of the market to offer the same price to both the trader and investors in the trader’s DARWIN.

 

divergence

 

The ability of existing liquidity to absorb additional investment volume is not linearly proportional to the growth of said investment volume in a given DARWIN.

This makes investors’ price get worse than that of the trader, as a DARWIN attracts more investment capital.

The data we offer takes into account the last 100 orders of investors, and from those 100, only the orders that get executed with a moderate latency, i.e. in less than 400 ms or average latency if average latency is higher than 400 ms.

This is because in all other cases, divergence can be caused by the price movement happening in the interval between the trader’s trade and investors’ replicating trade. This could distort the divergence calculation.

As a consequence, in some cases, calculated divergence can be very erratic due to the huge dispersion produced by the trader trading systematically in highly volatile conditions.

This can result in the divergence data not consistently reflecting the reality of the type of trading undertaken by the DARWIN and the real divergence that investors suffer.

For example, we recently had to close DARWIN PME because, despite its history of negative divergence, there was a brief period during which its divergence became positive. Many investors dared to invest in it until, on one unfortunate day, they suffered a massive negative divergence.

Affected investors rightly complained which was, among others, the reason why we decided to publish the evolution of divergence over time.

 

divergence


How should investors use the new chart?

It’s important that investors start using this new chart immediately, analysing not only the current monthly divergence but also the evolution of divergence over time. This way investors will be able to:

  • Identify cases like DARWIN $PME, historically high divergence without associated increase in investment volume.
  • Know whether current divergence – especially if its negative – is circumstantial due to good / bad execution of a few isolated orders or is in effect caused by an increase in investment volume.

How should traders use the new chart?

The new chart allows traders, especially those whose DARWIN has already started to suffer divergence, to evaluate whether measures they are taking to reduce divergence are effective or not.

We plan to offer more information in the future to allow traders to make better decisions when trying to reduce their DARWINs’ divergence.


Tip for investors

Investors should bear in mind that DARWINs that start having systematically negative divergence without an increase in investment volume, are DARWINs that – with very few exceptions – have offered few guarantees in the past.

Systematically negative divergence without an increase in investment volume, very probably means that the traders orders are identified by liquidity providers as toxic flow.

This is normally due to the trader trading in highly volatile / low liquidity conditions, or the trader using an EA that’s sold also outside of Darwinex.


We hope you like the new chart and would love to hear your comments and feedback!