Introducing DarwinexLabs – Prop Investing DARWINs

Introducing DarwinexLabs

We’re sending our Quant team on a new mission – and what better way to start than a new name?

Introducing DarwinexLabs!

What mission?

DarwinexLabs’ next mission is to openly beat the market leveraging the DARWIN data-set.

Why, and why now?

Re-loaded introduces a new visual interface, but the bigger changes are under the hood. All diagnostic and risk-management algos have been re-factored from the ground up to work better, faster. Informed DARWIN managers now enjoy good enough trader choice and tools to beat the market – or at least that’s our strong belief.

Because nothing beats walking one’s talk, we’ll openly take up the DARWIN prop investing challenge.

On that note, what does “openly” mean??

Read on for an explanation, including the strategic soul-searching that led to DarwinexLabs!

Open Trader Exchange – re-visited

To date, the Open Trader Exchange was open to anyonebut us. Proprietary investing in a limited capacity asset seemed a conflict of interest best avoided.

DarwinexLabs marks a shift in the thinking, for 3 reasons.

The first is that Darwinex is traders first. What pleases a trader more than investors queuing to back his strategy?

Sure, proprietary investments by Darwinex in a hypothetical capacity constrained marketplace could lead to conflict of interest. Until then, traders welcome every investor.

DarwinexLabs’ first mission is to saturate capacity… once saturation is accomplished, we’ll send it on another (capacity optimization?).

The second is efficiency. Optimizing investor performance accelerates the model.

More winning investors viralize AuM acquisition – our core trader value proposition. Investors making sub-optimal use of the available trader base and toolkit slow everyone down.

If winning more is possible, why not publicly commit to it?

The third is strategic. Any party reaping more dividends from the trader movement than Darwinex could compromise the Open model.


Open Trader Exchange – securing long term independence

Because, the better a strategy, the higher its ratio of trading profits to trading commissions.

A large, knowledgeable investor might earn more from DARWIN investor profits than Darwinex books in brokerage revenues (which is little, after rolling out diversification rebates).

If one believes – as we firmly do – that the movement’s individual and collective property is edge to beat the market… we must invest for profit.

Yes, Darwinex has an edge in that we charge everyone for execution – so we’ll have to manage a conflict of interest, but we’ll cross that bridge when we get there.

So, in a nutshell.

DarwinexLabs: the first step to close the Exchange and become a Hedge Fund?


DarwinexLabs means we’re:

  1. Sending our best assets (people & capital) to earn our best traders’ trust (THANKS), leveraging 5 years of technological development.
  2. Publicly committing to the DARWIN asset, by being first to invest meaningful capital in the DARWIN community.

And we’re doing so staying within the vision for an Open Trader Exchange.

DarwinexLabs – investor backing DARWINs

The “DarwinexLabs” investor will back DARWINs:

  1. For profit – unlike Darwinia ,  DarwinexLabs is about maximising returns. Rise of the fittest. Period.
  2. As a bog-standard user – it will enjoy no preference in access to DARWINs or execution prices,
  3. Transparently – DARWIN providers will see DarwinexLabs investments in the exact same way they see for other investors,
  4. Openly – DarwinexLabs will publish our learning curve – when we lose as well as when we win

DarwinexLabs’ only edge will be beta testing.

DarwinexLabs will be first to use any functionalities we come up with… with an Open commitment to release for public use any tools DarwinexLabs leverages profitably (of which there’s a ton cooking 🙂

Put it another way: we can’t expect people to back our asset unless we back it ourselves. So here we go.

Open Investment – How about community data?

This is another potential avenue for DarwinexLabs – a more complex, but potentially promising option.

The trader movement gathers momentum. The first investable traders has attracted more traders – and this creates community data. We thought all along that community behaviour is an edge facing the market… and Hedge Fund offers to market the community data validate the thinking.

However, before leveraging the data, a number of questions must be answered:

  1. Could this information be used for profit?
  2. If it canshould it be used?
  3. Whose information is it, anyways?
  4. Who could access it?
  5. Who could invest in it – if there are capacity constraints?
  6. Should any strategies leveraging community data command a success fee?
  7. If success fees accrue – whose bank account should receive them – given the community is an abstract entity?

These are non-trivial questions, and we appreciate getting the answer right is key for the movement – as a matter of fact, we’d like you to look at these & write up your own answers before reading on.

If, after reading ours, you disagree, we’d love to hear your take.

DarwinexLabs – trader leveraging Community Dataset

They’re tricky questions. If Darwinex is all about protecting trader intellectual property – shouldn’t community data be off-limits?

After quite some soul searching, “traders first” was the key guiding principle, and we hope you agree that our answers are indeed “traders first”:

  1. The trader movement could use trade-flow information, it would be naif to believe otherwise for institutional counterparties highly value it,
  2. The movement not only could but should use it. Winning strategies formulated from collective behaviour stand on a firmer statistical foundation, are more likely to attract investment in the DARWIN asset class (expanded to include collective data), which is good for traders long term,
  3. Whilst it’s Darwinex that kick-started the trader community, the community data is the community’s. Darwinex leveraging it for proprietary benefit would be “traders second”.
  4. Publicly granting access to the information would compromise trader IP – once published, there’s no way to collect success fees from investors. Which is why:
    • Short term, DarwinexLabs will be the only party with access
    • Medium term, we’re open to technological options letting data scientists leverage the data, without accessing it (more on this in the coming months)
  5. Strategies will be open for investment. Should they become capacity constrained, “traders first” will apply
  6. Waiving success fees on said strategies would disadvantage individual DARWIN providers – which is why DarwinexLabs will collect 20% success fees on its DARWINs…
  7. Because the data are the community’s, not DarwinexLabs’, success fees will be paid out to the DARWIN provider community.

All of which introduces an additional question: how should success fees be split?

We still need to figure out the best option – ideally with community feedback. For now our inclination is merit based. Rather than split e.g. EUR 100.000 success fee amongst 30.000 users = 3 EUR / user, it will definitely be top heavy.

Can collective & individual IP conflict?

If you’ve read this far… you’re probably wondering: where to draw the line between trader & trader community?

It’s obviously a tough one – so DarwinexLabs will ALWAYS stay well clear of any potential conflict of interest. The last we’d do would be compromise trader trust – our most sacred asset.

For that reason, and in line with “traders first”, we’re handing the decision over to a community member. The person in charge of DarwinexLabs will be Ali – Darwin provider Integracore2

We can’t think of a better option than Ali’s know-how, commitment to the vision and community contributions to get DarwinexLabs off to the best start. Further, we hope you’ll take our appointing a member of the trader ranks as proof to our commitment to integrity.

As ever, any suggestions on how to transparently put traders first will be most welcome!

Introducing DWC, the hedging DARWIN

Introducing DWC, the hedging DARWIN

DWC, the hedging DARWIN is DarwinexLabs first creation. It’s already listed at the Exchange.

This post lays out:

  1. The rationale for a hedging DARWIN?
  2. Lessons learnt in the development process
  3. How DWC revenues will be shared with the community

As you’ll gather, actively leveraging community data is a major strategic milestone for Darwinex. We’d be extremely grateful for your thoughts on the decisions made!

Why create a hedging DARWIN?

Because there are periods when markets become abnormally “tough” and sweep most traders.

DWC leverages community behaviour indicators to protect investors in those periods. It offers 2 use cases for DARWIN managers and investors:

    1. Hedging “deep” and “tough” tail market moves where DARWIN portfolio diversification breaks down – similarly uncorrelated DARWINs end up correlated
    2. Market sentiment based on real time exposure by the Darwinex trader collective – without compromising individual trader IP

NB: standalone investment is NOT a use-case. DWC is NOT designed for passive returns.

Back since launching the brokerage offering (May 2014), we’ve observed what appear to be recurring “market cycles” that last anywhere between 4-6 months.

These cycles typically involve:

  1. A 3-4 month “benign” cycle where DARWIN portfolios perform well
  2. A 1-2 month “sweep” cycle where portfolios struggle – without obvious options to diversify the sweeps away

All of which makes a hedging strategy a valuable addition to standard DARWIN portfolios…

What explains market sweeps?

Analysis of community behaviour suggests that the Darwinex trader collective suffers loss aversion – as highlighted by La (Loss Aversion attribute) grades below 5. It also highlights market conditions that “sweep” (literally) low La rated strategies trading longer than 1 day timeframes.

Loss aversion is a well documented cognitive bias. This gives us comfort in extrapolating the behaviour of our community to the global community. i.e. we’re onto something systematic – and therefore “predictable”. Loss aversion as a standalone reality might be a major driving factor behind the BOOM in the forex industry in recent years, and is certainly an explanation of CFDs in their “cash for dealers” impopular description.

(As a matter of fact, it probably explains why retail traders are offered top of book spreads well below the spreads available to institutional participants!)

How does the DWC hedging DARWIN work?

DWC trades whenever normally “symmetric” community sentiment (everyone randomly on either side of a currency) turns overly “asymmetric” in one or several pairs. In line with its hedging nature, DWC then trades the opposite way as a liquidity taker – e.g. DWC trades are routed to the market just like every other ordinary DARWIN – Darwinex does NOT deal against customers. DWC doesn’t enjoy a particularly high success rate, BUT it does make significantly more on winning trades than it loses on losing ones.

Designing DWC boiled down to efficiency: replicate (the inverse of) community positioning with the least transaction costs – remember, we’re not dealing, but paying the market to hedge community exposure. Whilst we won’t give away the key secret sauce , both backtest and live testing suggest we’ve reached a good compromise – possibly because DWC only works for FX pairs, where all the community “votes” on a few select currencies.

DWC has traded live funds since shortly before the GBP flash-crash (which it anticipated and profited from :-). Both backtest and live behaviour have met ingoing requirements, so with the announcement of DarwinexLabs, it’s time for Exchange listing!

 What have we learnt?

DWC has been a rewarding research project, with the following core takeaways:

  1. DWC’s La (Loss Aversion) grade is 9.2 – which makes DWC yin to the community’s loss averse yang
  2. DWC sports a Cp (Capacity) grade of 10 – we believe it could well reach 500+ million AuM, e.g. there’ll be plenty of supply
  3. Luckily (or perhaps not?) it nailed both of the latest extreme market sweeps (SNB CHF move and GBP Flash-Crash)
  4. It’s a valuable leading indicator – watch out for DWC holding few trades as this could anticipate a swing in the market
  5. It’s a procyclical strategy – which explains its poor timing (Os & Cs grades)

Whilst we won’t disclose DWC´s live trades, its equity curve is valuable assistance in spotting “benign” vs. “tough” market conditions. Because it struggles when the community profits, it could be used as an indicator when:

  1. Approaching the end of it’s 3-4 down cycle could be a harbinger of “toughening” to come (winter is coming 🙂
  2. Correlating negatively with any DARWIN (starting by one’s own) might be worth some consideration!

 Who owns DWC?

That’s the million USD question!

For “Regular” DARWINs Darwinex collects a 20% success fee which is then then paid out to its provider. Given DWC’s provider is DarwinexLabs (i.e. Darwinex’s Quant team), should Darwinex pocket 20% success fee? Surely this is a conflict of interest given DWC builds on community data? Should DarwinexLabs waive a success fee?

As you can see, this is but one of several interesting questions.

The first decision made is for DWC to collect 20% success fee – just like any other DARWIN. Waiving the success fee would amount to “dumping” on regular providers.

The second, and perhaps more controversial one, is for DarwinexLabs NOT to retain any share in success fees collected for its DARWINs (including DWC and follow-up strategies). These will be collected, then shared with the DARWIN provider community, on merit.

We are internally debating on the best allocation key, and will explain the criteria in upcoming blog posts. What we do know is that we will share fees on a meritocratic basis (e.g. the better the trader, the higher the share).

Reaching both conclusions has required a fair amount of soul searching – so much so it’s quite relevant to share the main sticking points. As a matter of fact, it’s imperative, for we might revise our decision as we gather more information.

 What happens going forward?

Community unequivocally belongs to traders. Period.

Having said that

  1. Darwinex actively invests in growing and supporting the community,
  2. DarwinexLabs requires highly qualified (=expensive) and motivated personnel. One thing is to access the community data, quite another is to derive and optimize investable strategies from it. Broker-dealers generate outsize returns b-booking off the back of said information. Whilst Darwinex will never conflict with its users, arguably it merits some claim on any profits generated.
  3. The community benefits from the strategies as it is – anyone is free to leverage the strategies for an 80% (100% minus the 20% success fee) share in the upside.

We have decided NOT to make community datasets publicly available, as this could compromise trader IP: any community member could leverage community data in competition with DarwinexLabs.

For as long as we can’t remedy this, we’ll waive any share in the success fee… and we want your take on this, for this is a key strategic decision for Darwinex going forward!

Do you want to know more about this unique DARWIN? Your wish is our command! Here’s an insightful webinar about DWC hosted by Juan Colón where he explains the rationale, for Darwinex and DARWIN investors, of backing the DWC.


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