BOARD

Retail forex trading to be banned in Europe?

23 August 2016

Last week saw a potentially momentous move by a European regulator – the Belgian market authority banned  the distribution of some OTC derivatives to retail counterparties. The move is likely not to stay isolated. ESMA, the pan-european regulator has recently issued yet another warning. The regulatory radar has firmly focused on the sector – with trends in the US pointing in a similar direction.

In effect, Belgian’s move might be a first in a movement to gradually ban OTC trading of binary options, spot forex contracts and CFDs (Contracts for differences). We have received a lot of customer questions asking how this affects Darwinex. This blog post outlines why we think it was about time that regulators stepped in, and why it validates many of the structural choices we’ve made in servicing the independent trader movement.

Why retail forex OTC is wrong …

An OTC contract allows two counterparties to trade with each other in conditions that both adhere to. It has the potential benefit that anything can be traded, provided both parties agree to it. It can work well between evenly capitalised and knowledgeable parties (e.g. UBS and GS) – although one wonders if even institutions understand the economics behind the clauses they sign.

Offer OTC trading to retail customers (e.g. remove the “equally capitalised and knowledgeable” provision), and OTC means trouble. Take, for instance, a retail broker-dealer, advertising the following bet to any novice retail trader:

  1. Bet on the “price of the EURUSD” as published (e.g. SET) defined by the dealer
  2. The retail broker-dealer and the retail trader agree to settle the differences in the price set by the dealer
  3. The broker-dealer throws in the bonus option of multiplying any movement in the underlying up to 500 times – which can greatly amplify the wins! (and the losses)

Screen Shot 2016-08-23 at 12.50.37

We know where this ends: retail investors losing their shirts. Note: the blame doesn’t only lie with the broker-dealer, he didn’t impose the 500:1 leverage choice on the trader – greed and ignorance did. Having said that, there are 2 RED flags in the above set-up:

  1. A retail-dealer’s business model largely is pocketing the losses greatly compromises its incentives.
  2. A retail-dealer sets the price of the underlying – e.g. it’s both a player betting its own capital and a referee in the same game.

Not saying that all dealers incentivise their customers to do silly things – but given how profitable the above meat grinder is, is it realistic to expect them to stop customers blow themselves up?

There you go. That’s why the Belgian ban is likely not to be the last we hear on the topic. It only took 10 years, but the good news is:

  1. Regulators have finally stepped in
  2. The alternative solution has long existed (we’ve offered it all along!)
  3. We’ll (Darwinex) stop feeling like fools for doing the right thing and losing out to morally loose competition

… And why retail OTC is obsolete

If you think this problem is new, think again. This has happened every time a new investment opportunity came up.

The solution has long existed. It is to create a “marketplace” – commonly referred to as “Exchange” for financial instruments. Rather than trade bilaterally (pairwise) with bespoke (OTC) conditions with each other, a new central counterparty (CCP) is created, that trades a single standardised contract acting as the middleman that anonymously connects all participants with each other. Read this to understand the difference. This levels the playing field in a way that makes it structurally impossible for anyone party to abuse the market without making itself vulnerable to arbitrage.

There is one situation in which marketplaces don’t work well: with non-standard contracts. Without critical mass in liquidity, it’s too difficult to make a marketplace work, and in that situation market makers are probably better suited than a central counterparty. This is the reason why retail forex trading started OTC: even though no asset is more plain vanilla than spot foreign exchange, 10-15 years ago 1) it wasn’t possible to trade micro-lots in the interbank market, 2) there weren’t as many retail market participants as there are today.

Fast forward to today, and the restrictions are gone. You can trade micro-lots with Goldman Sachs on a marketplace / Exchange. Betfair founded LMAX, the first MiFID compliant multilateral trading facility (MTF) for foreign exchange and CFDs. We have been with LMAX from our very beginning because a) we think it’s the right way and b) we didn’t want to be caught off-guard when regulators (finally) acted.

Why the ban doesn’t affect Darwinex, now or going forward

We have consciously chosen to:

  1. Align ourselves with traders by
    1. Operate a matched principal model. We are a pure broker that trades with customers. We gain NOTHING when customers lose.
    2. Offering a platform allowing traders to legally scale their strategies with investor monies – removing their structural need to over-leverage
  2. Offer unique technology & tools to
    1. Inform traders, amongst others, of the risk (Value at Risk) in their strategies
    2. Protect investors when markets become riskier or traders over-leverage
  3. Trade on Exchange – by sourcing
    1. All of our CFD offering from a regulated Multilateral trading facility – e.g. Darwinex CFDs are NOT OTC.
    2. Part of our FX flow from a regulated Multilateral trading facility – e.g. part of our FX flow is NOT OTC

Furthermore, this is the reason why we’ll soon be offering Futures trading – we’ve simply had it with the stigma condemning even the clean guys in the forex sector.

The only reason we don’t source all our FX flow from LMAX Exchange is that LMAX suffers (and will suffer) from adverse selection until the ban spreads beyond Belgium. Because it doesn’t tolerate last look by LPs, and because it allows any participant (e.g. it doesn’t ban winning traders, regardless of strategies), it has historically been less competitive on raw spread comparisons – LPs offer wider spreads to protect themselves from winning traders, who tend to concentrate with LMAX once they’re banned by retail dealers.

Put it another way: a casino admitting winners offers worse (and worsening!) odds than casinos banning winners. Being as competitive price-wise as possible, together with the need to have a backup provider, is the reason why we partially aggregate liquidity from other parties on an OTC basis. If the regulatory push to trade on Exchange goes Europe (or world) – wide, we will continue servicing customers – this time without the commercial penalty we incur for NOT pocketing their losses.

In other words: rest assured that once this healthy regulatory movement comes full circle, both the independent trader movement and Darwinex will benefit even more from being structurally aligned for profit exchange. Please do not hesitate to highlight points that warrant further clarification – as this post will likely attract long term readership 🙂

 

Last News
ws30

Mini contracts for the WS30 index are here

9 April 2020

Nuestros traders ya pueden abrir, en plataforma MT4 y MT5, 0.1 lotes del índice WS30 en vez del mínimo de 1 que permitíamos anteriormente.

Our traders can now open, on the MT4 and MT5 platforms, 0.1 lots of the WS30 index instead of the minimum of 1 that we previously allowed.

In addition, following our strategy of continuous improvement, we have substantially narrowed the average spread of the WS30 to a target spread of 2 points during US opening hours. Commissions and swaps remain unchanged.

 


Photo by investmentzen / CC BY

apalancamiento esma

Margin increase on XTIUSD (Professional Clients)

8 April 2020

Our margin requirement for XTIUSD trades will be increased today for Professional Clients. The new margin requirement on XTIUSD will be 5% as opposed to the 3% until now. This change is a security measure due to the increase in market uncertainty and volatility and the consequent decrease in liquidity. The change will take effect […]

Our margin requirement for XTIUSD trades will be increased today for Professional Clients.

The new margin requirement on XTIUSD will be 5% as opposed to the 3% until now.

This change is a security measure due to the increase in market uncertainty and volatility and the consequent decrease in liquidity.

The change will take effect today April 8th 2020 5 pm BST and will apply to both existing and new positions.

Kindly make sure you have enough available margin and equity in your account for the new margin levels.

Need help? Please don’t hesitate to contact us at info@darwinex.com.

Darwinex Trading Schedule Easter 2018

Trading Schedule for the 2020 Easter Holiday Period

31 March 2020

Please note the amended Darwinex Trading Schedule for the 2020 Easter Holiday Period.

Please note the amended Darwinex Trading Schedule for the 2020 Easter Holiday Period.

Times are displayed in BST (UK time) and changes to regular schedules are highlighted in red.

Instrument

Thursday 9th April  Friday 10th April  Monday 13th April
FX 22:04:01 Wed – 21:59:50 Thu 22:04:01 Thu – 21:55:00 Fri 22:05 Sun – 21:59:50 Mon
Commodities* 23:00:01 Wed – 21:59:50 Thu CLOSED 23:00:01 Sun – 21:59:50 Mon 
DARWINs 22:05 Wed – 21:59 Thu 22:05 Thu – 21:55 Fri 22:05 Sun – 21:59 Mon
Indices      
Europe50 23:00 Wed – 22:00 Thu  CLOSED  CLOSED
GDAXI 07:00:00 – 21:00:00  CLOSED   CLOSED
SPX500 23:00 Wed – 22:00 Thu  CLOSED  23:00 Sun – 22:00 Mon
WS30 23:00 Wed – 22:00 Thu  CLOSED  23:00 Sun – 22:00 Mon
NDX 23:00 Wed – 22:00 Thu  CLOSED   23:00 Sun – 22:00 Mon
J225  23:00 Wed – 22:00 Thu CLOSED  23:00 Sun – 22:00 Mon
AUS200 23:00 Wed – 15:00 Thu CLOSED  CLOSED 
FCHI40  23:00 Wed – 22:00 Thu  CLOSED  CLOSED
UK100 23:00 Wed – 22:00 Thu  CLOSED   CLOSED 
SPA35 07:00 – 19:00  CLOSED   CLOSED 
US stocks 14:31 – 20:59   CLOSED  14:31 – 20:59  
Crypto instruments 23:00 Wed – 22:00 Thu   23:00 Thu – 21:55 Fri   23:00 Sun – 22:00 Mon

 

XAUUSD closes a minute earlier, and opens a minute later than the rest of Commodities in Darwinex as shown in the table of Darwinex assets and spreads.

Please note during Easter Holidays, swaps will be charged in a different way than on normal weeks. There may be days with swap x6 charges and days without any swap charges at all. The amount of the swap will be similar to that of normal weeks, the only thing that changes is the way it’s charged. The swap rates that appear on our site generally get updated around 19:00 BST and may suffer only minor changes afterwards.

Also note that on Friday, April 10th the US market will be closed. Fx spreads thus may widen considerably. Both traders and investors should avoid setting tight stop loss levels.

The DARWIN Exchange will remain open even if the underlying assets’ market is closed. Should you want to know the standard procedure when you buy/sell a DARWIN whose underlying asset market is closed, we recommend you to read the following Knowledge Base article: Can I buy and sell DARWINs whenever I want?

Do not hesitate to contact us at info@darwinex.com for support.

Happy Easter!

apalancamiento esma

Important update on XAUUSD liquidity

24 March 2020

Please be informed that  high volatility across the markets is leading to sharp moves in indices & currencies and spreads in the spot market have widened dramatically. Specific to XAUUSD, liquidity within the futures market remains thin and unstable mainly because refineries are shutting down and it is impossible to move metal. We are doing our best to […]

Please be informed that  high volatility across the markets is leading to sharp moves in indices & currencies and spreads in the spot market have widened dramatically.

Specific to XAUUSD, liquidity within the futures market remains thin and unstable mainly because refineries are shutting down and it is impossible to move metal.

We are doing our best to manage these issues for you, however please note that XAUUSD pricing may be erratic and  intermittent in the coming days.

Please remain aware and vigilant to the increased risk on XAUUSD trades.

May we finally wish you and your beloved ones all the best for this COVID19 crisis.
As always, at info@darwinex.com we remain at your disposal should you need assistance.
Stay strong,
Your Darwinex Team
apalancamiento esma

FCHI40 and SPA35 Equity Index CFDs Update

20 March 2020

In light of the shortselling ban introduced in France and Spain, as of market open on Sunday 22nd March 2020, the opening of short positions in the FCHI40 and SPA35 Equity Index CFDs will be no longer allowed until further notice. The closing of existing short positions, as well as the opening and closing of […]

In light of the shortselling ban introduced in France and Spain, as of market open on Sunday 22nd March 2020, the opening of short positions in the FCHI40 and SPA35 Equity Index CFDs will be no longer allowed until further notice.

The closing of existing short positions, as well as the opening and closing of new long positions will continue to be permitted in these assets.

Please don’t hesitate to write to info@darwinex.com with any questions you may have.

Launched: New DarwinIA Pages

17 March 2020

We introduce you to the new style of DarwinIA information and ranking pages, our monthly capital allocation.

Why

Let’s face it – the previous version was too complex – trying to explain how it worked, how to enter plus the standings for the month was just too much.

The Leaderboard ranked all participating DARWINs by rating. Running month rankings and final winners lacked visual distinction. Not to mention when DARWIN providers checked their own standings… and to top things off – legacy standings were only available from our blog :-(.

What

We’ve split information in two:

  1. The Leaderboard proper
  2. How it works, and how to participate (aka, the explanatory page)

The new DarwinIA Leaderboard

  • includes links to final standings for any previous edition,
  • visually highlights winners, focusing on the top 3 DARWINs,
  • lets you share standings with the world, and
  • intuitively provides all information relating to your own DARWIN(s) & DarwinIA.

DarwinIA

The new DarwinIA explanatory page features

  • new copy,
  • a prize calculator,
  • prize distribution and rating variables are visible at all times
  • instructions to enter DarwinIA, and
  • a FAQ section.

 

Both pages are now mobile-friendly as well!

What’s next

The Hall of Fame! Expect a major redesign later this year!


Do you like the new DarwinIA design? As always, your comments and feedback are welcome.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. -- % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.