LeapRate ran through a demo of the Darwinex interface last month, a FCA (UK) regulated entity that pairs skilled traders with investors’ capital and got a first hand view of the benefits of having a firm put a trade strategy through the ringer in order for it to become investment ready in the eyes of the Darwin Exchange. Billing itself as the Exchange that lists Dynamic Asset and Risk Weighted Investments for the FX market, this could be the next big thing as the benefits are clear to all parties involved, creating win-win scenarios for fund managers/traders, FX investors and the broker.
Juan Colon, company head at Darwinex (incorporated still as Tradeslide Trading Tech Limited – former brand name), was nice enough to sit down with us here at LeapRate and answer some questions pertaining to the brokerage. The FX retail brokerage market has not seen anything this sophisticated in terms of opening up investable trading strategies to a wide audience under one roof, where conflicts of interests are mitigated and trade leaders and investors protected from moral hazard across the board. Check out the full interview below:
LR: Thanks for the interview, aside from pointing interested trade leaders (Darwin Providers) and investors in those strategies over to your firms FAQ, can you describe in a nutshell what Darwinex represents to both trade leaders and potential investors?
Darwinex means direct access to traders and investors, without intermediaries.
Investors directly access the raw talent of independent traders currently beyond reach. Traders directly share investor profits, with 0 sunk costs and 0 effort attracting or hand-holding investors.
As an independent technology provider and an FCA regulated broker & asset manager, we align trader and investor incentives for mutual profit exchange. Since independent trader talent is virtually untapped and there’s no intermediaries, the benefit to both sides can be substantial.
LR: You have a very unique system in creating an investable derivate out of a trading strategy — where the asset’s inception’s price begins at 100. Does this represent units of currency where $100 USD will purchase one share? Does the amount allocated to a certain DARWIN affect the share price or only the strategies underlying performance?
The listing price is an index used for reference when calculating performances. If you buy at 100 and sell at 101, you make 1% plus/minus the replication slippage. A DARWIN’s assets under management affect investor performance, since the price of the underlying asset traded moves against investors as AuM grow – which is why DARWINs are closed for new investment when investor performance slips.
LR: When a trader wants to setup shop through your company, will the performance be different from holding an internal MT4 account with Darwinex versus an outside MT4 or cTrader account with another brokerage?
Whilst we diagnose any strategy on MT4 or cTrader with any broker, we only list DARWINs traded with Darwinex. We have investigated the possibility of allowing strategies with other brokers at length, but we have concerns about track-record fraud and intellectual property leaking. Ultimately our investors demand execution quality and we can only guarantee by controlling end to end execution.
To make the transition as smooth as possible, we allow traders to migrate their existing track-record and offer 100% DMA, competitive spreads and commissions.
LR: Investors do not even need to open up an MT4 account, they can deposit their funds and choose and allocate their investments all through your web interface?
That’s right, investors configure their investment through our web or mobile platforms.
We moved away from 3rd party PAMM solutions as these often disclose underlying trades to investors, deploy inadequate ex post risk management methodologies. Ultimately developing our own technology allows us to evolve it as we, not the provider, see fit.
LR: Can you explain in a little more detail for our readers the scalability problem and why you limit the max investment in strategies, how is the firm working to hypothetically accept a higher amount of capital per strategy, or does the strategy have to qualify first to become eligible to receive more funds, what is closed max allowed right now per DARWIN?
We analyse tick level data because market liquidity is finite: the bigger your trades, the more market depth you wipe and the more entry and exit prices move against you. Marginal profits drop with new dollars under management, so much so that with enough AuM a strategy winning on e.g. 50k loses on 2 MM. This is the reason why scalability is a key DARWIN investable attribute.
We disclose investor slippage and shut DARWINs to new investment once investor profits slip by too much. However, a one size fits all AuM limit does not do the trick, because every strategy trades different assets with different market depth, in more and less liquid market conditions. We limit slippage, not AuM. We will be in a position to provide more details once we’ve explored true market depth first hand with sizable investor funds
LR: If a professional algo trader does not use MT4 or cTrader’s programming code, can you describe how easy it is to obtain access to your FIX-API?
We offer FIX 4.4 API trading access. Further, we’re finalising a REST API together with a test group of algorithmic traders to cater to their needs – and this will be available in Q1 15 with no restrictions.
LR: Do you show how much capital is invested in a certain DARWIN?
We disclose investor assets at risk for each DARWIN instead of capital. This is more accurate since investors pick their own risk. To a DARWIN provider, 100 USD with 16% (i.e. 16) monthly at Risk represent 4 times the success fee potential of 100 USD at 4% (i.e. 4 USD). Investor assets at risk are apples to apples comparable, whereas capital is not.
Further, we disclose trader equity is at risk in the strategy, to ensure all incentives are aligned.
LR: Currently you have been only accepting traders to build up the investable DARWIN provider database, when will you accept investor accounts?
We have been testing the technology with random strategies and our own funds for months now. This week we’ve accepted the first pilot group of investors. The plan is to gradually welcome investors in the queue as the user experience and technology exceed their expectations.
LR: Do you envision some DARWIN providers will be able to earn a full time living if they maintain successful strategies?
This is our mission.
We’re here to offer independent traders a legal, viable business model in freedom. They trade at competitive conditions (100% DMA, no-requotes, no last-look, 2.5 USD commission per USD lot), with 0 sunk costs, wherever they choose. We provide 3rd party independent credibility (we rate and manage strategy risk at arms’ length), tools to improve their strategies and investor capital to legally scale their income under FCA regulation.
Their business model is a share in our commission revenues plus a 15% success fee on their DARWINs. N.B. the 15% fee is net of DMA spreads (0.3 pips in the EUR USD on average) and an average commission of 5 USD per lot, round trip, so it’s a whole lot more profit exchange than higher nominal success fees with conflicted, non-DMA, execution, wider spreads or higher commissions.
The winner in our inaugural Darwinia investability contest was a Chinese algo trader who took home 950 Euros for 2 of his strategies, cash, no strings attached. This will grow as with profits exchanged, but it’s hopefully proving that we walk our talk.
LR: What is your general plan to get the word out there about this investing service – will you market to investors who are traditional stock investors who may have never looked at actually trading FX themselves? Do you have a sales team in place or do you plan only mass marketing with a support staff?
We much prefer outstanding customer experience over traditional marketing, because the Internet powers user word of mouth.
What would you buy: a FTSE or NYSE 500 stock returning 20% in a good year or a DARWIN consistently returning 40+% with comparable and managed risk, immediate liquidity and no correlation to the market?
Investors may start in demo mode if they like, then move on from as little as 50 USD. We are confident that people will invest more and let their friends know once they experience evolution first hand…
LR: If this concept really takes off, do you see yourself entering markets such as the United States?
We take steps one at a time… there’s plenty of room to empower FX traders first!
Beyond that, our technology is FIX based and our algorithms can handle any asset with linear risk (not options at the moment), so multi-asset execution and widening our EU MiFID footprint are a natural next step.
But doing things properly takes time and all our focus is on serving our first believers. If we get evolution right, growth will take care of itself!
To find out more about investing on the Darwinex Exchange or becoming a Darwin Provider, please click here to visit Darwinex yourself.
To read the company FAQ, click here.