CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64 % 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.

Should Darwinex make use of their market dealer license to profit more?

Due to the recent ESMA regulations update, Darwinex was forced to change its broker license to a market dealer. However, Darwinex continues forwarding all traded volume to the market.

Today. Juan Colón (Darwinex CEO) commented that if Darwinex ever matches microvolume internally, as acting like a market dealer, they could save lots of money in commissions resulting in higher revenue. This could have a great impact in Darwinex business model:

  • increasing the budget on R&D
  • increasing the budget for marketing
  • lowering trading cost for traders

Also, I think this could be an opportunity to do something different than any other market maker.

As customer and fanboy of Darwinex, I want them to grow faster and stronger, so I would not mind if they create an internal exchange for matching part of the traded volume. What does the Community think about this? Let’s help them take a decision.

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Where were these comments made?

Spanish radio podcast. You can listen from Darwinex youtube channel or Ivoox

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I think that the decission has already been taken, and due to the recent disclosures about how the liquidity provider is acting, it would be the best choice.
I’ve listened the interview today, and if something about lowering trading cost for traders was said, i didn’t catch it. Anyway, I trust Darwinex’s team ability to keep growing!

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Agreed with your stance @Aimak. I wouldn’t be shocked neither call it outrageous (if or not it’s for the good cause)
There are market maker brokerages that are doing somewhat okay as long as we’re talking low volume + non toxic trading

Hmm, they have always vehemently insisted that Darwinex is NOT and will NOT act like a market maker. Then they got that license, and insisted that this changes nothing, they just had to because ESMA was forcing them to offer negative balance protection with their previous license.

Now, matching small orders internally? While I am not extremely opposed to the idea, I can’t help but feel like this is the start of a slippery slope.

I personally think Darwinex should stick to their old promises.

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I don’t see a problem with matching orders internally; as long as you trust the broker there is no negative impact to you or anyone else.

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Sure, but saying one thing today, and doing another tomorrow - that can give serious cause for distrust

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There is nothing better than an honest market maker. You skip one intermediary and everyone profits. However, a couple of problems arise.

It’s absolutely mandatory that ALL orderflow is processed internally. There are many brokers that are running a hybrid model keeping the good orderflow (losing traders) in house and passing the toxic orderflow onto their liquidity providers.
Of course, LPs don’t like that and as a consequence use their last look privilege excessively resulting in high slippage and absurd execution delays for traders that are passed onto that book.

How is this new market maker protecting itself vs toxic orderflow like arbitraging or trades in very high volatility? It’s a tough business and I know from experience that just because you can insource a task doesn’t necessarily mean you should do it.

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@yhlasx Many thanks for pointing this out, and you’re right that this is a risk I’m very keen on managing.

First off - I agree this is a very sensitive topic that we’ll have to approach very carefully, as anything that’s intimately close to the vision, and your views are very welcome.

Second - a bit of context. The podcast that @Aimak mentions was part of a series where we’ve publicly shared some thoughts on the natural evolution required for Darwinex to achieve the vision. The first podcast was about potential enhancements to the trader compensation model (find ways to provide fix income so that longer drawdowns are easier to bear, etc.). In this particular program, we tacked potential improvements to the Darwinex model. This was one of several topics raised

Third - a reminder on the vision. The Darwinex vision is to be home to committed traders. We want the next George Soros to first hear about Darwinex at age 15, so that he’ll be making a killing from investors by age 20. For that to happen, nailing the investor promise & business model is a necessary ( offer great terms to the whizzkid), but not sufficient condition to bring about the vision.

Fourth - It’s not necessarily sufficient, because as things stand, young George Soros (and many of his potential retail investors) won’t hear about Darwinex until age 20, or until investors have quit. Before that, he will have wasted precious time in venues like eT…o, B.X and other places not as conductive to his growth (in my humble and vested opinion). He might choose to apply to Goldman Sachs or whatever, and then not contribute to our vision

Fifth - this begs the thought of whether Darwinex should better be offered to institutional investors who better understand the differentiation in our model. That’s food for another post, and we’ll talk about that in due course. Best to come back to our young Soros, for now.

Sixth - meanwhile, the reason things currently stand the way they do is because retail trading is a burn and churn game where 99.9% of intermediaries are gambling outfits that a) spend GBP 1200 to get a sucker in the door and b) make 2x-3x that suckers money. With our current business model, we’re servicing customers as per our standards, feeding consistently losing flow to the LPs (who therefore love us), and thus have a structurally lower margin than others.

Sixth - we’re evaluating “anti-DARWINs”, whereby every community member will be offered to take the other side of a DARWIN manager. E.g. Darwinex will be a marketplace matching long and short interest, transparently, without conflict. We had officially introduced these in the Spanish podcast (where we test community reception first :slight_smile: I hope you’ll agree that offering anti-DARWINs squarely pre-empts any issues in that everyone will be allowed to short everyone else. E.g. unlike “market makers” we’ll democratize the right to be “the house” for every Exchange participant, and this is what makes Darwinex structurally different from any market maker on the slippery slope.

Seventh - nonetheless, there’s an area of potential savings that has come to our attention. Many PBs out there (including our own) run “aggregation” books, whereby they only offload risk to the market if and when tons of small tickets reach a certain size. E.g. instead of routing every micro-lot to the market, the way we’ve always done with them - they’ll “aggregate” micro order flow before off-loading if/when it hits e.g. 1 lot of aggregate exposure long or short a pair. They take our flow without slippage and charge us the going commission, without passing it on to the LPs.

Eigth - if that’s the case (and we’re pretty sure it’s the case), we’re being a tad moronic by paying PBs commissions for aggregating in a certain way which we’re entitled to with our new license, without a) contradicting the vision, b) taking on risk or c) (and most importantly) jeopardising our service to customers.

Ninth - We’re not talking pea-nuts here. Depending on where you set the aggregation threshold for “micro”, Darwinex could save several hundred thousand EUR a year, which frankly are better used paying new engineers to develop e.g. anti-DARWINs, than they are used by literally gifting our PBs with commissions for nothing

Tenth - I hope you appreciate that we’ve deliberately taken a risk by airing an internal debate publicly, and that I’m personally replying to this thread and outlining our thinking pretty transparently.

Either way, you’re right that taking any step (which we have not done to date) in this direction could be construed as the beginning of a slippery slope, and that’s the reason we’re totally open to answering any questions / concerns you might have.

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Always great to hear from you @KlondikeFX!

I’m not going to comment on the market maker element, although I agree with you it isn’t necessarily a bad thing.

All I can say for now is that our strategic priorities are elsewhere - e.g. we want to focus our resources on attracting and nurturing the best traders. I think we could, with resource investment, optimize to become an “honest market maker” as you mention, but there are others who do that job well already and we don’t see it as the most promising area to differentiate.

If we do anything on this front, it will be strictly restricted to micro-tickets on our trader flow, with a view to reducing our PB bill, and without any kind of adverse selection.

E.g. you’re totally right that just because you can insource a task you shouldn’t do it, and in this case, Darwinex won’t. If our research supports the business case, we’ll offer the anti-DARWINs and would love it if customers pocketed systematic losers instead of LPs - this will result in a better deal for all community members, including Darwinex, as per the vision

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Thanks for clearing that up. Happy to hear that there won’t be said selection of flow

I am not confident that there is such a thing as a systematic loser. The reason most traders are losing are the fees in the form of commission/spread and overleveraging. As investors can’t pocket the fees they need to profit from the overleveraging and I am not sure how this would work without taking unreasonable risk themselves. This could just work if the investment of multiple investors could be combined and spread amongst multiple Darwins, imo.

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Agreed on the systematic losers. But note that matching DARWINs and antiDARWINs could be a way to save both the commissions and the spread…

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As long as you don’t fundamentally misalign the incentives of your clients and Darwinex, and can openly and sufficiently make the case that incentives aren’t misaligned, I think it will be fine

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I just heard a buzzz in the air : “Too exciting news (developments) ! Can’t handle the heat” :partying_face:

It appears that preparing opinions by planting seeds patiently will end up in the most unique environement.
Thank you Darwinex for being SO free spirited!

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Traders have accidents,rarely they lose consistently.Such guys are discouraged pretty quickly and/or bankrupted.But how do you know when a reckless trader is about to commit another grave mistake,when will he go out of control again?

You dont need a consistent loser, you just need that the wannabe gives up after your investment on a lower quote, then you move you investment on the next wannabe/dreamer. :wink:

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A looser obtain unpredictable results.

So when shorting you obtain unpredictable results minus spread-swap-commissions.

I dont think it’s a good idea to invest in shorting a Darwin.

But I think it’s a good thing for improving local clearing (with no intermediate costs).

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It is not a Holy Grail , you just have to do the opposite, no sell and hold but sell and rotate, you create a filter for losers, than you rotate it after a quarter to catch new fresh meet of losers, you play the game of the brokers.

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Consistent losers are rare but exist :
https://www.darwinex.com/darwin/TTB.4.6

:smile_cat:

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