This interview is brought to you by InvestingReviews.co.uk
Welcome to the C-Suite, a monthly interview with leading executives in the retail trading industry.
Long-term readers may remember that the first episode of the CFDs Weekly podcast was with Darwinex CEO Juan Colon. That came about because I think Darwinex is one of the more interesting companies in the sector, with a relatively unique product in a sector full of companies doing similar things.
As the company recently launched its new product Darwinex Zero, I figured it would be a good time speak to Juan again and see how the product launch is going and what the company has been up to over the past year or so.
DK: We spoke a little under 12 months ago. It’s been a bit of a mixed time for brokers since then. How are things going at Darwinex?
JC: We’ve grown 100% on the investor side, so that’s been quite a healthy clip and we’re really happy to see that continuing to do well. On the trader side, it’s been a bit more muted, so we’ve only seen about a 20% to 30% increase in traders, but I think that’s probably not such a bad outcome when you look at the wider industry. It’s getting harder to grow for everyone I would say.
DK: Yes, that’s certainly what I’m hearing. You’ve just launched this new service, Darwin Zero, can you talk through that? What is it, how does it work and so on?
JC: Sure, so this is part of our strategy to grow away from the core FX/CFD business that we have. It’s not the only thing we’ve done in that regard. We’ve added cash equities and futures trading. We also have an integration with Interactive Brokers, so these things are helping diversify the business.
But Zero is a similar step in the sense that it’s an intermediary stage for people with a demo account, who are bored of just trading that account but aren’t ready to risk capital on a live account. I think the positive here is we already have people that have made this work for them. The top guy on Darwinex has over $22m in AUM and is able to make a living from that. So there is real incentive there for someone to try Darwinex Zero and then move ultimately to become funded like that person.
On that point, I’d also say that we see it as better to take someone at this early stage and nurture them to develop the type of track record that investors want, as opposed to someone who is on their fifth brokerage account and just going to blow up.
DK: Going back to investor numbers going up, we had this situation where bonds and equities fell together last year, so I can imagine people may have been looking for alternative investments that provided some safety from that dynamic. From my point of view we may also be at the end of a credit bubble market cycle and ETFs may look less attractive as a result. Do you think that’s helping you?
JC: That was definitely the case, yes. I mean, we have been handicapped fighting against an equity market that made 10% or 15% per year just by allocating to a tracker fund. So it does become harder to convince people to invest when that’s the case.
So yeah, we’ve seen people worry that they wanted both liquidity and also diversification, low correlation to mainstream assets because everything ended up correlated over the past couple of years, right? It was the houses, the stocks, the bonds, the cryptos. Everything just went up and up and up, until it didn’t.
DK: Can you also talk about the Interactive Brokers deal you made?
JC: That is a plug and play setup where someone with an Interactive Brokers account can connect to us and then we can make a trackable, investable index on the back of that.
What I mean is that, someone with an Interactive Brokers account has their trades saved and has got an accessible track record as a result. So what you do is give Darwinex permissions to access your account history and get real time confirmation of your trades. That then becomes the ‘Darwin’ as we call it, which is then accessible to our investors.
So if you are an Interactive Brokers user, you have your strategy exposed to investors and you also aren’t having to start afresh and lose your prior record on our platform. It’s basically a simple way for Interactive users to get access to capital and there’s no additional cost or anything from their point of view. It’s all included in your Interactive account costs.
DK: Ok, so going back to Darwin Zero, it is kind of like a funded traded programme, right? So is there some sort of fixed timeframe or set of criteria you need to hit in order to get investment?
JC: I wouldn’t see it as a binary choice and I think that’s one of the problems you see with some providers out there. It’s a long journey to go from zero to the point where you are investable, which is why we gave it that name – Zero.
So what we’d hope is that you develop over time. Let’s face it, if you are new then you are likely to see a period of losses. But the hope is that you develop over time to the point where you can put together a track record. And so you keep going and eventually reach that point where you can deliver consistently. That’s really the process, it’s not quick.
What we’ve tried to do is engineer an environment which is a full life-like replica of what it is to start and act as a hedge fund manager, with the hope that you’ll ultimately prove yourself and be in a position to invest real capital.
DK: So there isn’t a predetermined way to get access to capital?
JC: I’d compare it to training for a marathon or becoming a body builder. You know, no one expects that you have done no training and are going to suddenly be able to beat an Olympic athlete.
So with Darwin Zero, you’re paying 38 euros a month and so, just like you pay to train at the gym, you are going to be losing that money initially. But if you keep going and prove yourself then that cost starts to be more than offset by the returns you can generate if you are allocated capital.
And there isn’t a fixed time as to when that happens, right? You could very quickly get an allocation if you already have some experience. You’re not going to become a millionaire or that kind of thing, but you can pretty quickly get a free service from us because it’s quite easy to cover 38 bucks per month with a comparatively small amount of capital. Alternatively you might take much longer to reach that stage.
Either way, over time you can hopefully build a couple of grand to have your first live account, or at least the confidence to be able to trade the grand or the two grand, which you would’ve blown if you had gone from demo onto live without knowing what you were doing, which will happen to most people.
DK: So this might be a bit of a niche question but there may be some assets where even a small trader can have market impact. I’m curious how that works on a demo account because if the trade isn’t going to market, how do you see what the impact is?
JC: If you’re trading on Darwin Zero, you’re basically trading on live market depth. So it’s got the same slippage that you will experience in ‘real’ life and so on. All of that is reflected in the platform we’ve built.
That’s actually something I’d say sets us apart because we’ve spent ages developing that process. So we’re paying for live servers, co-location services and so on – the whole lot – and it has been very costly and time intensive to develop that product.
DK: On the point of standing out, in saying that you’re alluding to the fact funded trader or prop trading type programmes have become really popular. I am amazed at how big some companies are in this field. Can you talk about that at all?
JC: We launched Zero two weeks ago and we’re seeing very, very decent traction. We’ve done almost no promotion but are seeing a large number of signups.
Unfortunately the pervading approach to this model is a bit different. So I’d go back to that gym analogy. The approach a lot of companies take is you should do no training and then show up at the Olympics to try and beat Usain Bolt. It’s not going to happen.
Our angle is different in the sense that we’re trying to build more of a community of people that see this as a long-term process and are realistic about what the potential returns are.
But the reality is, again unfortunately, that there are a lot of people out there that may not be taking that approach. That creates a bit of a hurdle for us because it can mean people are sceptical about our model. But you know, it is what it is and we are capable of dealing with that.
DK: So are most people using Darwinex based in Spain or is it global?
JC: We book about a third of our revenue in Spain and about half in Spanish-speaking countries.
We’ve been around for a while though and what we’ve built is a bit of a technological monster. So I’d say despite being around for a while, we’ve put in the building blocks to try and create this healthy dynamic of connecting traders with capital. And now we’ve got that tech platform in place we can add other features and products, but also expand in other departments. So we didn’t have a marketing department until nine months ago – that’s quite new.
I suppose the point I’m making is that we’ve built this model and we’re now starting to see traction properly. So although we started in Spain, we’re definitely going to be expanding beyond here and already are.
DK: One of the things I’ve wondered about Darwinex is how exactly it works from a revenue point of view. It’s a really interesting idea in theory, basically connecting traders with capital. But even if we took the biggest ‘manager’ on the platform with $22m, that would be considered tiny in the asset management sector. Even if you were doing 2 and 20 style fees, you wouldn’t be making much.
JC: I’ve had this question from every potential shareholder in the company, so I understand where you’re coming from. I’m just going to use an analogy. Facebook has users and customers. The customers are the advertisers who pay to reach the users. We have users, namely investors, and customers, the traders that pay to get access to the investors.
So we pass through all the fees we can to traders because we want to be the place in the market where they are paid the most per unit of success. But traders are also part of that model, where brokerage fees are generated. And they are happy to pay that, either from trading or in the subscription to Darwinex Zero, because they then get access to the infrastructure to both connect with investors and also to trade. Those things sound trivial but they take years and years to build.
So you can think of it as a way for an asset manger or hedge fund manager to pay a fee so that they can focus solely on investing, with someone else handling all the other aspects of the business, whether that be sales or operations. And this creates a virtuous circle because you have more investors coming and more traders coming and the two sort of feed off each other in a positive way.
DK: Can you say anything about who the investors on the platform are?
JC: The bulk is on the retail side but it leans towards more professional or knowledgeable private investors. So we’re well above $100m AUM now, which means we’re a midge in the asset management world but probably quite big in the CFD industry.
The average ticket size is about $35k, which is pretty good considering the sector we’re in. But we’re also seeing much larger investors. Some of them have already put in large sums but we’re seeing more and more professional allocators that are interested in the platform. They’re testing the waters and that means putting in a few hundred grand or over a million.
A lot of it has been driven by more professional types. So they may work in finance and be impressed, then tell their friends about it. There is a close circle of these sorts of people who have come to the platform and are just impressed by the returns the traders on Darwinex have delivered.
We would not shut the doors to the small guys but we are likely to grow more towards allocators and professional investors moving forward.
DK: Yeah, sure. One of the other things I wanted to follow up on was you’re point about adding cash equities and listed derivatives. A lot of people in this sector are wedded to CFDs and I see why, given how straightforward the product is to produce and market. But at least anecdotally I see some appetite for listed derivatives and aversion to CFDs among retail traders. Do you have any thoughts around that?
JC: Well, I think there are definitely some people that see CFDs as ‘cash for dealers’ and that can create problems. But the reason we added CFDs is because we think the instrument is beautiful in the sense that it gives people the option of creating diversified portfolios without capital. And the kind of demographic we go for, which is the kind of people who want to grow into managers at some point, they’re not in the business of providing ‘cash for dealers’. They’re trying to kind of learn and eventually build a track record.
So in that sense, we kind of got accidentally lumped in with some of the other companies that weren’t acting so well. And that has made life a bit more difficult for us but we aren’t the only ones who have ‘suffered’ in that regard either.
The second point is that I think a CFD is a great place to start trading when you’re capital constrained. When you have enough capital, the next thing is probably to try and graduate onto the exchange listed markets because you get more guarantees there and, anyway, at some point a CFD is going to be hedged against that market, so you might as well go straight for the real thing when you are able to do so. But again, you need a good amount of capital to do that, so a CFD is going to be the best option for many, particularly early on.
DK: How does that work from a revenue perspective? If you look at some options brokers in the US, for example, margins are pretty similar to listed CFD providers.
JC: I can’t talk about options but futures have more of a natural overlap with the CFD industry, both from a client’s perspective and ours, in terms of trade volume and brokerage fees. Equities are different because, although you might have some active traders, a lot are just going to buy and hold.
DK: You’ve talked a bit about regulation. I look at the prop trading or trader funding industry now and it’s insane how big some of the firms are. They’re often doing very aggressive marketing but then there is almost no regulation, from what I can tell, on the sector. Do you think that’s going to stay the same?
JC: I think it’s here to stay and I think it even could threaten players in the CFD industry. Because it’s similar people with a new model and it’s growing so much.
In my opinion it’s not a question of ‘if’ the regulators will get involved but ‘when and how’. And again, it’s so, so frustrating for us because we are doing something quite different but superficially it looks the same.
So it will happen. Hopefully we grow to a point where we make our case to say, ‘look guys, we’re different and we can prove there’s an element of skill and alignment in our model, which just doesn’t exist for so many other providers.’
DK: I get the impression regulation has been a bit of a source of frustration for you then?
JC: For us I think the hardest thing has been that a lot of providers have gone offshore since 2018 and used poor practices. But then the regulator punishes the regulated firms even more, rather than trying to solve the problem of companies going offshore.
DK: It is unfortunate…
JC: But you know what I’d say is that there have been problems like that since we started, so it’s not necessarily new for us or for lots of other companies in this industry. And from my point of view, we’re building a good product and a good community. I don’t go to bed at night worried someone is out to get me. I’m happy to do webinars with clients and show them who I am. So I think that shows there is more longevity in what we’re doing.
