All I Want for Christmas Is a Broker-Dealer
This time of year, the phrase “woman-owned business” conjures images of soft knitted scarfs, ethically sourced coffee grounds, and the gift card you always receive from your Aunt Carol. We read that label as a communication of values: either the values of the purchaser, or the recipient, or both. Afterall, there is no better way for someone to show that they “get” me than a gift of new hand wraps from my favorite woman-owned boxing gym.
But this year, the label means something more to me. I’ve taken a majority stake in Proof Services, the subsidiary broker-dealer of our parent company Proof Trading. As a result, our broker-dealer is now a woman-owned business, and we will be pursuing NY state certification as such. I’m proud to be taking this step, and even more proud to have a team that embraces it!
The woman-owned label is supposed to be a positive, empowering thing. But its continued existence also belies the stubborn entrenchment of inequality. We define, call out, and support women-owned businesses in finance because they remain rare. Which begs the question: is the label actually helping? And what does it really mean anyway — for the companies that claim it, the customers who seek it out, and the industry in general.
What it means for Proof’s broker-dealer
In a technical sense, our restructuring of Proof Services means that I am now a majority owner, and this gives me a higher degree of control over strategic decisions. This isn’t really a change in anything day to day. Since Proof has a small team, I was pretty integrated in the daily operations and decision-making already. But it does mean I now have more official weight when it comes to major business decisions. In particular, Proof Services cannot be acquired without my sign-off, something that wasn’t true before if enough other stakeholders banded together.
This new degree of control is in line with how I view my role in Proof’s business. I co-founded a company because I wanted to exert a shaping influence, especially when it comes to Proof’s culture and policies around transparency and accountability. Some things that I wanted to see baked into the DNA of a company — pay transparency, scientific rigor, and positive social impact — are rare in the financial services sector. My new level of control at Proof reflects the level of responsibility I feel in trying to bring these elements to life within the company and within the industry more broadly.
What it means for Proof’s clients
For some of our clients or potential clients, woman-owned status is a straightforward value-add. They might have company policies that require or encourage trading with women and minority owned brokers, and getting to count Proof towards that will make it easier for them to send us orders. We view the label as a fairly natural extension of our mission-driven ethos, and complementary to our vision of Proof a vehicle for positive change in the industry.
More broadly though, there is lot of apathy or skepticism towards woman-owned brokers. There is a presumption that women-owned businesses will offer lower quality services, and that choosing brokers with such criteria in mind is a violation of best execution responsibilities. This opinion mirrors skepticism about other kinds of social-impact initiatives in finance, such as ESG-based investing. The logic goes: any constraints imposed on how one conducts business must inherently reduce profits. A company whose hands are tied by non-monetary concerns is just trying to solve the same hard problems as other companies, but with less available tools. Hence we should expect their performance to be suboptimal. In particular, this means that putting positive weight on a label like “woman-owned” in a broker selection process is therefore fundamentally at odds with best execution.
There are a few holes in this argument though. One is that different companies are not solving the same hard problems. Each broker is solving their own problem: how do they provide their services profitably? In theory, a client pays an institutional broker to trade their flow as effectively as possible. But a broker can use the degrees of freedom available to them to make money from clients by other means. Such behaviors range from the comically malicious (feeding customer orders to a secret prop trading desk to be front-run), to the normalized and expected (over-hyping new “machine-learning” algos that just have a logistic regression in them). [Aside: if you work on a secret prop trading desk, how does your mother describe this in her holiday letter?] In many cases, those “moral” constraints that clients worry will make a broker less effective can actually anchor a broker more firmly to the problems the clients want solved.
A second hole in the argument is the assertion that more degrees of freedom are always good. In a strict mathematical sense, this is true: the maximal number from a superset of options is always greater or the same as the maximal number from the more limited set of options. But human, algorithm, and corporate behavior span so many possibilities that it’s not reasonable to think of brokers as setting out all of their possible choices on a table, perusing them one at a time, and choosing the best one. Rather, we should picture them adrift in an endless warehouse of nearly identical-looking boxes, opening a few here and there in search of something better than what they’ve found so far. It’s impossible to open all the boxes, so they are mostly choosing based on habits. In this setting, constraints can be helpful — especially if they focus you on a smaller selection of boxes that is more likely to contain good things. At Proof, we are big believers in the idea that tying your hands in some domains can actually be freeing. It simplifies decision making and helps you to focus on what you really want to be focusing on.
What it means for the finance industry
Zooming out beyond Proof for a moment, I do have reservations about women-owned status as a vehicle for meaningful change in the finance industry. Though well-meaning, it can devolve into a box-checking exercise that serves no one well. Clients of women-owned businesses have an easy way to say they are doing “something” about gender equality in finance without having to take a hard look at themselves. Kind of like the family members who eat meat all year and then give everyone holiday vegan cookbooks. We care about this, they are saying — in the abstract way that doesn’t disrupt anything else about our lives. How many companies that use women-owned brokers also have a gender-balanced workforce? How many have generous parental leave policies? How many have a female CEO?
Sometimes, I’m inclined to believe that doing “something” can be worse than nothing. But only if we let people off the hook. As an industry, we are doing it wrong if we say, “well, people are using women-owned brokers, so I guess that gender stuff is covered.” But we can do better if we say, “ok, so now people are using women-owned brokers. What’s next?”
I do have some ideas that remain on my wishlist. A robust mentoring program for women across all career stages in finance. A free training and coaching service for underrepresented students pursuing internships in finance across gender, race, and socio-economic dimensions of representation. More companies like Sequin and Daylight that focus on the needs of groups otherwise underserved by the finance system. More disclosures and constraints around compensation. Incentives for companies to track and improve on diversity across their employee ranks. And those new hand wraps would be nice.
But for now, I’ll settle for a broker-dealer.
