Abstract

This paper explores the integration of the Darwin Risk Engine with the Global Algorithmic Trading Software (GATS) to enhance performance and risk reporting. By standardizing risk management and providing independent validation, this integration aims to create a more robust, reliable, and transparent trading system. Additionally, we discuss various performance indicators essential for evaluating trading strategies. This integration aligns with our partnership with Darwinex and the educational objectives of the Global Elite Proprietary Trading Program (GEPTP).

Introduction

The Global Algorithmic Trading Software (GATS) is a sophisticated trading system designed to manage multiple trading strategies across various asset classes. Despite its advanced capabilities, the need for independent risk management and standardized performance metrics remains crucial for credibility and comparability. This paper proposes the integration of the Darwin Risk Engine, known for its independent risk management and risk standardization, into GATS.

Integrating the Darwin Risk Engine with GATS

Overview of Darwin Risk Engine

A DARWIN is an independently risk-managed and investable index that combines a trader’s signals with Darwinex Zero’s Risk Management Engine. The Risk Engine standardizes DARWIN risk to a target monthly VaR comparable to the S&P 500, ensuring that all DARWINs can be compared on an equal basis.

Benefits of Integration

1. Credibility: Independent third-party validation enhances trust in the system.
2. Comparability: Standardized risk metrics allow for apples-to-apples comparisons.
3. Capital Protection: Protects capital from erratic trading behavior.
4. Performance Fee Collection: Facilitates legal management of third-party capital and performance fee collection.

Additional Performance Indicators

To provide a comprehensive evaluation of trading strategies within GATS, we introduce several key performance indicators:

Return

The total return represents the percentage gain or loss of an investment over a specific period. It is a fundamental measure of the performance of a trading strategy.

Annualised Return

Annualised return is the geometric average amount of money earned by an investment each year over a given time period. It provides a standardized measure of performance, allowing for comparison across different timeframes.

Max. Drawdown

Maximum drawdown measures the largest peak-to-trough decline in the value of an investment portfolio. It indicates the risk of a strategy by showing the maximum loss an investor could have faced.

Daily Standard Deviation (STDV)

Daily standard deviation measures the volatility of daily returns. It provides insight into the consistency of a trading strategy’s performance.

Annualised Volatility

Annualised volatility is the standard deviation of returns scaled to an annual basis. It is used to assess the risk of an investment, with higher volatility indicating greater risk.

Sharpe Ratio

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as:

Sortino Ratio

The Sortino ratio is a performance metric that focuses on downside risk, making it more relevant for traders concerned with negative returns. It is calculated as follows:

Integrating the Sortino ratio into GATS allows for a better assessment of risk-adjusted returns, focusing on the downside risk that traders aim to minimize.

Skewness

Skewness measures the asymmetry of the return distribution. Positive skewness indicates that the right tail of the distribution is longer or fatter than the left, suggesting a higher probability of significant positive returns.

Kurtosis

Kurtosis measures the “tailedness” of the return distribution. High kurtosis indicates more frequent extreme returns (both high and low), suggesting higher risk.

ATH Quote

The all-time high (ATH) quote is the highest price level reached by the DARWIN since its inception. It reflects the peak performance of the strategy.

Days (Since ATH)

This indicator measures the number of days that have passed since the ATH was reached. It helps assess the recent performance and recovery capability of the strategy.

Return (Since ATH)

This measures the return of the DARWIN from its ATH to the current date, providing insight into its performance after reaching the peak.

Implementation Plan

Data Collection and Signal Management

• Capture and store signals from GATS strategies.
• Maintain a historical database for backtesting and validation.

Risk Engine Integration

• Standardize risk to a 3.25-6.5% target monthly VaR.
• Implement the Risk Engine to adjust risk levels in real-time.

DARWIN Quote Calculation

• Develop a real-time calculation system for the DARWIN quote.
• Incorporate execution and financing costs into the quote.

Protecting Intellectual Property

• Ensure the DARWIN replicates signals without revealing them.
• Implement strong data encryption and security measures.

Credibility and External Validation

• Utilize Darwinex Zero’s independent risk management and performance reporting.
• Maintain transparency in reporting while protecting trading strategies.

Comparability and Benchmarking

• Standardize risk across all DARWINs.
• Compare performance against external benchmarks.

Capital Protection and Management

• Integrate with Darwinex Zero to attract seed capital.
• Continuously monitor for irrational trading behavior.

Performance Fee Collection

• Ensure compliance with regulations.
• Implement a performance fee structure based on DARWIN performance.

Technical Integration and Testing

1. APIs Development: Connect GATS with Darwinex Zero’s Risk Management Engine.
2. Testing and Validation: Conduct rigorous testing and backtesting.
3. Deployment and Monitoring: Deploy in a live environment and monitor performance.

User Training and Documentation

• Provide user training on new features and functionalities.
• Develop comprehensive documentation for the integrated system.

Global Elite Proprietary Trading Program (GEPTP)

Overview

The Global Elite Proprietary Trading Program (GEPTP) is a premier educational experience designed to equip individuals with comprehensive academic and practical knowledge in finance, investment, and proprietary trading. This program offers an in-depth exploration of advanced algorithmic strategies, market analysis, risk management, and their real-world applications.

Partnership with Darwinex

As part of our commitment to providing the best education and tools, we have partnered with Darwinex to offer special lectures on DARWIN within GEPTP. This partnership provides our students with direct access to industry-leading risk management practices and performance evaluation metrics.

Program Details

Through GEPTP, participants will master sophisticated trading systems, enhance their trading skills, and effectively manage trading risks, preparing them for successful careers in trading, finance, and investment.

For more information, visit our GEPTP page.

Conclusion

Integrating the Darwin Risk Engine with GATS will create a more powerful system by enhancing performance and risk reporting. This integration leverages advanced risk management to protect capital, standardizes performance metrics for better comparison, and provides a legal framework for performance fee collection. By incorporating additional performance indicators, we can further refine the evaluation and management of trading strategies, ensuring a comprehensive and nuanced understanding of their performance. This integration aligns with our educational goals in the Global Elite Proprietary Trading Program (GEPTP), providing participants with cutting-edge knowledge and tools for success.

References

• Darwinex Zero. (Year). Documentation on DARWIN and Risk Management Engine.

About the Author

Dr. Glen Brown is the esteemed President & CEO of Global Accountancy Institute, Inc., and Global Financial Engineering, Inc. With a career spanning over 25 years, he stands at the forefront of the financial and accounting sectors, known for his visionary leadership and groundbreaking achievements. Holding a Doctor of Philosophy (Ph.D.) in Investments and Finance, Dr. Brown’s expertise covers a broad spectrum of financial disciplines. He is a fervent advocate for continuous learning and innovation, inspiring future financial professionals through his roles as Chief Financial Engineer, Head of Trading & Investments, Chief Data Scientist, and Senior Lecturer. His guiding philosophy, ‘We must consume ourselves in order to transform ourselves for our rebirth,’ encapsulates his holistic approach to professional and personal development.

General Disclaimer

The information provided in this paper is for educational and informational purposes only and should not be construed as financial, investment, or professional advice. The integration of the Darwin Risk Engine with GATS and the performance indicators discussed are theoretical concepts intended to enhance understanding and analysis. Past performance is not indicative of future results, and trading involves substantial risk, including the risk of loss. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.