Proof Trading Progress Update: 18 Months

When Allison and I started Proof on a wing and a prayer at the end of 2018, our goal was to launch sometime in 2020. There were obviously a huge number of open questions at that point: what exactly was our product, what would be our differentiating features? Who if anyone would be joining us on this journey? Would we be able to fundraise? Find customers? Would there be an unforeseen obstacle we couldn’t overcome?

We are now halfway through the year, and suffice it to say we haven’t launched yet. But the good news is we are getting close! Most of the day one product and model features have been designed and the individual components of the system built. We have selected our external vendors and partners, and we have early adopter customers who have committed. At this point, the main tasks remaining on the development side are to tie up loose ends and complete integration and testing of all of these pieces. Integration and testing, however, is one of the most challenging and laborious stages of this entire process. Though it feels like we have a functioning trading platform at our fingertips, there is still a mountain of work between now and the point where we’re comfortable flipping the switch for live trading.

Our goals now are to lock down the individual component interfaces and begin production integration by early August and perform our first live trade by the end of the quarter. We’re in the home stretch!

Major updates

• Proof Services LLC, our broker-dealer subsidiary, participated in its Membership Interview with FINRA on 4/14/20.
• We selected Credit Suisse as our partner for DMA.
• Made substantial progress on the product and technology fronts.
• Published an in-depth account of how we set up our tick data research environment.

Goals from our previous update

Technology

Development complete, including QA testing.

• (8/10) We didn’t quite complete the development of all business and UX components, but we are nearing the completion of an MVP (minimum viable product) build. As for testing, while the infrastructure components are fairly well tested, we still need to put in a fair bit of work to make sure the pieces fit together.

Begin production environment design and deployment.

• (4/10) We began the setup for the production environment, especially in terms of networking, but we still need to develop scripts that allow us to create a repeatable production deployment.

Make significant progress on all external integrations.

• (7/10) We have established a pair of cross-connects between our AWS environment and our extranet provider. We are in the process of establishing connectivity to our market data provider (Exegy), and we will be initiating the process of connecting to our order entry destinations (IEX and Credit Suisse) shortly.

Regulatory

Proof Services should continue to be extremely responsive to follow-up requests from FINRA, particularly as the end of 180-day approval timeline nears (i.e. late July).

• (9/10) Proof Services successfully completed a technology demo for FINRA as part of its Membership Interview on April 14, and it has responded to all subsequent FINRA requests in a timely fashion.

Product/Research

Lock down and implement the day one design of our core trading algorithm(s).

• (6/10) We have the main pieces of the design intelligence and are currently performing more sanity and robustness checks on historical data before locking down the design. We have started implementation.

Design sanity checks and performance testing for algorithm designs using historical data (to the extent possible).

• (6/10) We have designed and implemented several sanity checks and robustness checks so far, still some bases left to be covered though.

Design a framework for A-B testing algo designs that can be used once we are trading live.

• (0/10) We did not get to this yet. Prioritizing finishing the day one algo design tasks above.

Sales

Identify day one (i.e. “founding”) customers.

• (9/10) Our day one customers are lined up and ready to go — thank you!

Continued focus on buy side engagement and producing content.

• (5/10) We did produce some public-facing content this quarter — an in-depth blog post on OneTick and a comment letter to the SEC on market data infrastructure — although less than usual. We hope to get back to our regular pace of publishing external content after launch.

Operations

Determine partner for DMA and set timeline for integration (e.g. pre vs. post launch).

• (9/10) We selected Credit Suisse as our DMA partner and intend to fully integrate prior to launch.

Have a clear integration plan/timeline for the respective EMS provider of each day one customer.

• (4/10) We’ve spoken with the EMS providers we plan to connect to on day one, and we’ve scoped out the respective timelines, but we have not yet begun integration.

Establish a formal process for evaluating potential new hires.

• (8/10) We established a standard process for evaluating potential new hires and applied it to the candidates we considered over the past few months. We will likely publish a blog post detailing our approach to recruiting in the future.

Goals for the next 3 months

Technology

• Lock down individual component interfaces to begin integration by early August.
• Release production trading system.

Regulatory

• Proof Services should obtain all necessary regulatory approvals to go live.
• All Proof Services employees must pass required FINRA exams prior to launch.

Product/Research

• Finish the day one algo design, its implementation, and testing.
• Design further tests that can be run on our live trading data (once we have it) to continually validate, evaluate, and improve the algo design.
• Release a public-facing pre-trade analysis tool along with thorough documentation of its design, based on our research on historical data.

Sales

• Onboard initial customers.
• Continued focus on buy side engagement and producing content.

Operations

• Integrate with all external entities and perform first live end-to-end trade.

Progress summary

Here are our full updates across the board:

Technology

• System Build: (a) We are feature-complete with all of our infrastructure components such as messaging middleware and the application framework (b) We are ~80% complete with the initial cut of a resilient order management system and a full-featured algorithmic trading engine supporting multi-stage strategies. © We are feature complete with real-time market data processing components, including subscription management and dissemination to algo engines. (d) On the connectivity front, we have completed the build of resilient client gateway components and will soon initiate work on the outbound gateways for order entry (e) We are nearing feature completion of the UX system for internal support, which includes the authentication and authorization pieces.
• We have established a pair of dedicated, diverse, and redundant (active-active using BGP multipath) cross-connects between our AWS environment in Northern Virginia and NY1/NY5 locations in Secaucus. We are in the process of establishing production connectivity with Exegy for the purpose of consuming real-time market data feeds in AWS. We will also be requesting order entry sessions into IEX and Credit Suisse shortly.

Regulatory

• Proof Services participated in its Membership Interview with FINRA on April 14th, which included a technology demo.
• Proof Services received a post-Membership Interview request for information from FINRA on April 24th and submitted a response on May 22nd.
• Prerak completed his required FINRA exams (Series 7/24/57/63) and Beau will be completing his required set (SIE/Series 99) shortly.

Product/Research

• We have selected a market-adjusted slippage metric (“distilled impact”) for measuring execution performance, and we have developed quantitative models for pre-trade analysis and volume prediction. These are the main pieces of the algo design intelligence. We are currently performing more sanity and robustness checks on historical data before locking down the design.

Sales

• While we tried to still maintain a light touch with our buy-side relationships, we did reconnect with several firms this past quarter, some of whom have agreed to connect and trade with our execution algorithm on day one!
• We performed an in-depth research analysis for one buy-side firm who provided us with their execution data, and we will be delivering a write-up of that analysis to the firm shortly.

Operations

• We do not plan to directly connect everywhere out of the gate, and instead we plan to access most exchanges and dark pools through another broker. There are two main reasons for doing so: 1) there is substantial overhead in establishing and managing venue connections and 2) almost all exchanges have volume-based pricing tiers and they generally provide much better pricing to members who hit those tiers. In many cases it is more expensive to access those venues directly than through a larger broker’s MPID to take advantage of their tiers. We evaluated four potential DMA providers and selected Credit Suisse. We are very excited to be partnering with them on day one!