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

Amended Trading Hours for Australia Day (26 January 2021)

21 January 2021

Please be aware that Australia Day will be held on 26 January 2021. Kindly note that during this time spreads may be wider and liquidity may be thinner. Also, the following amended trading hours will apply. Indices  Tuesday 26 January 2021 AUS200 06:11 – 22:00 UTC The rest of the assets will trade according to their usual […]

Please be aware that Australia Day will be held on 26 January 2021. Kindly note that during this time spreads may be wider and liquidity may be thinner.

Also, the following amended trading hours will apply.

Indices  Tuesday 26 January 2021
AUS200 06:11 – 22:00 UTC

The rest of the assets will trade according to their usual trading time.

See the full calendar of amended trading hours.

As always, at info@darwinex.com we’ll be happy to assist you!

Trading Hours for the US Martin Luther King Day on 18 January 2021

11 January 2021

Please note the amended trading hours that will apply on Monday 18 January 2021.

Please note the amended trading hours that will apply on Monday 18 January 2021.

🕤 All times in the following table are UTC (Coordinated Universal Time).
⚠️ During bank holidays spreads may be wider and liquidity may be thinner. They usually also give rise to changes to the applicable swap rates.
Commodities   Monday 18 January 2021
XAUUSD Early close at 17:43 UTC
XAGUSD Early close at 17:59 UTC
XTIUSD Early close 17:44 UTC
XNGUSD Early close 17:44 UTC
Indices
J225 Early close at 17:58 UTC
SPX500 Early close at 17:58 UTC
NDX Early close at 17:58 UTC
WS30 Early close at 17:58 UTC
US Stocks
All US stocks Closed

 

 

 

 

Related information:

As always, at info@darwinex.com we’ll be happy to assist you!

brexit

Brexit, the endgame: what you need to know in a no-deal Brexit scenario

16 December 2020

With the year coming to an end and Brexit coming into force on January 1st 2021, we would like to remind you that Darwinex is Brexit ready. Below are some updates for both existing and new customers. Please note that these will be relevant only in the case of a no-deal Brexit.

With the year coming to an end and Brexit coming into force on January 1st 2021, we would like to remind you that Darwinex is Brexit ready. Below are some updates for both existing and new customers. Please note that these will be relevant only in the case of a no-deal Brexit.

No-deal Brexit for existing EU customers

What changes in your relationship with FCA-regulated Darwinex in a no-deal Brexit scenario? In short: nothing, if you’re an existing customer.

  1. The FCA continues to protect your right to trade with us.
  2. Your monies remain with Santander UK, Natwest Bank or Sabadell UK in London.
  3. Your Funds enjoy FSCS deposit protection and Lloyd’s insurance for up to GBP 500,000.

Brexit doesn’t impair your right to trade with counterparties in 3rd countries outside the EU. You could trade with Australian brokers, you continue to enjoy the right to trade with UK brokers.

No-deal Brexit for new EU customers

For Darwinex, a no-deal Brexit scenario means restrictions to market to new EU customers with our FCA entity. We’ll shortly share details of our new license in the EU, which will offer identical conditions to our UK entity.

Our FCA-regulated UK entity will, in any case, continue accepting EU customers whenever reverse solicitation applies. Reverse solicitation means traders and investors approaching Darwinex on their own initiative and Darwinex not having solicited them to trade or invest.

We’ve recorded a podcast episode about Brexit and prepared a Brexit FAQ. Feel free to send to info@darwinex.com any questions you might have and we’ll answer them for everyone’s benefit!

Navidad

Darwinex Trading Hours for the 2020 Christmas & New Year Holiday Period

14 December 2020

The Darwinex Trading Schedule for the 2020 Christmas and New Year Holiday Period is already available in the calendar of Amended Darwinex Trading Hours.

Christmas is around the corner!

The Darwinex Trading Schedule for the 2020 Christmas and New Year Holiday Period is already available in the calendar of Amended Darwinex Trading Hours.

Note that during the Cristmas and New Year holiday period spreads may widen and swaps may be affected by the ‘turn’ effect. The ‘turn’ effect is a phenomenon that exists in financial markets which is caused by supply and demand for funding over key dates such as year or quarter-end. This can create anomalies in the forward curves for certain currencies, and we are already beginning to see this priced into the year-end swap points that we receive from our liquidity providers.

Further, you may want to check out what happens if you want to buy/sell a DARWIN which has underlying trades open with different opening/closing times.

As always, if you have any queries, please feel free to contact us at info@darwinex.com.

The Darwinex Team wishes you a Merry Xmas and a Happy New Year!

Trading Hours for the 2020 US Thanksgiving Holidays

17 November 2020

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 26th and 27th of November 2020.

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 26th and 27th of November 2020.

During bank holidays spreads may be wider and liquidity may be thinner. They usually also give rise to changes to the applicable swap rates.

All times are UTC.

 Instrument November 26th 2020 November 27th 2020
COMMODITIES
XAUUSD Close at 17:44:00
Close at 18:29:00
XAGUSD
Close at 17:59:50
Close at 18:14:50
XTIUSD
Close at 17:44:50
Close at 18:29:50
XNGUSD
Close at 17:44:50
Close at 18:29:50
INDICES
J225
Close at 18:00
Close at 18:15
SPX500
Close at 18:00
Close at 18:15
NDX
Close at 18:00
Close at 18:15
WS30
Close at 18:00
Close at 18:15
STOCKS
US Stocks Closed
Close at 17:59

The rest of the assets will trade according to their usual trading time.

As always, at info@darwinex.com we’ll be happy to assist you!

apalancamiento esma

NextEra Energy Stock Split 4:1

19 October 2020

The NextEra Energy stock split is approaching. At Darwinex we will apply the stock split on October 27th.

The NextEra Energy stock split is approaching. $NEE shares will be split 4-for-1. The number of shares will be multiplied by 4 and share prices divided by this same value.

At Darwinex we will apply the stock split on Tuesday October 27th at market open.

In live accounts we will adjust open position to the split without the need to close and reopen trades. Pending orders will be cancelled. In MT5, the hedged positions will be closed and the split will be applied to the resulting net position.

In demo accounts we will close all open positions in $NEE on Monday afternoon. Pending orders will be cancelled.

$NEE stocks will be available for trading from Tuesday, October 27th, at the post-split price.

As always, at info@darwinex.com we’ll be happy to assist you!

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.