Capacity measures whether the DARWIN’s return decreases when the capital of investors increases. The higher the score, the more likely that the DARWIN can manage a higher volume of investment without the divergence due to investment volume having a significant impact on its performance.
The market liquidity is finite. If a DARWIN starts to manage a large number of investors, the price traded in the market could be worse due to a lack of liquidity to fill the whole aggregated volume from investors at the price the order is sent. This can be harmful for all the investors because the high the investment volume, the higher the divergence per volume.
Before that happens the trader can change how they trade in order to adapt to the new volume and/or ask to pause the possibility to buy their DARWIN, so as to protect their current investors. In this case, the investor can only sell the DARWIN, not buy it.
A trader can use various techniques in order to improve their capacity and therefore reduce the divergence, por example:
1. Split trades into smaller ones spread out in time by at least 2 seconds
2. Avoid trading during low liquidity moments periods (Forex between 17:00-18:00 NYT, Indices between 18:00-01:00 NYT), high volatility events such as news releases or during high tick volatility
3. Trade with a higher range of pips
Don´t miss our latest webinar on Capacity Management in which we will cover:
1- A review of the DARWIN replica process
2- A primer on liquidity provider economics and
3- General and practical guidelines on how to maximise the capacity of your DARWIN.