Proof Trading Progress Update: 2 Years

We started Proof two years ago, and everything we have done has been leading up to this moment: launch. We are pleased to report that yesterday, January 4th 2021, our broker-dealer subsidiary executed its first trade in a live symbol! We have two pilot customers currently going through the onboarding process, and we expect the first pilot customer to go live within the next couple weeks. We will be starting out with our VWAP algo, and soon thereafter we’ll release our version of a liquidity seeker. We will be sure to publish in-depth materials explaining exactly how the algos work. It has been a long and exciting road to get to this point, and we’re proud of how much we have accomplished with such a small team.

2021 will no doubt be an inflection point for Proof. So far everything has gone to plan, but the post-launch journey is full of unknowns: how well will the product perform in live trading? If our algos do not demonstrate a measurable improvement over the status quo, we will need to keep iterating until we do create something special. And if and when we do get to that point where we have a great deal of confidence in the product, will we be able to convince customers to try it? Whereas the path over the first two years has always been clear and straightforward, the next 1–2 years will be the real test of whether Proof has staying power. Exciting times ahead!

Call to action: potential early clients

Before we get into our recap of the last two years, we have an ask of our network. Our broker-dealer subsidiary is finally in a position to onboard customers, but only certain types of asset managers have the appetite and willingness to work with a brand new and still unproven algo provider. At this point, we’re looking to connect or reconnect with potential pilot customers and early adopters, so if your firm or a firm you know may fit one of these descriptions, please let us know:

• Pilot customers (i.e. first wave, within 0–6 months). With just our two existing pilot customers, that should be enough to help us iterate to a mature and high functioning platform, but it would be wonderful to find a handful more, just to broaden the types of trading workflows we have exposure to. We get it — everyone is busy, and there aren’t a lot of folks who are interested in being what is effectively a beta tester of our platform. We don’t have performance numbers to point to, and the onboarding process will be extra clunky, as you’ll likely be the first firm using your EMS/OMS to connect to us. At this point, we need pilot customers more than they need us. That said, if your firm is not having a great experience with its existing brokers and is eager to try something new, or if you simply believe that our mission is worthwhile — that competition from new entrants is a healthy mechanism to push the industry forward, in particular from a firm that emphasizes transparency, data driven research, and market structure expertise to the extent we do. If you agree with that and would like to help, we would love to talk. We will be eternally grateful to all of our pilot customers. As a thank you for believing in us from such an early stage, we are a making a commitment that pilot clients will receive our best pricing for life. In other words, if another client down the road negotiates better terms, we will notify all of our original pilot customers and adjust their pricing accordingly. Finally, for firms with unique needs or workflows, we have a greater capacity and ability to build special accommodations now than we ever will in the future, so that would be another reason to connect early.
• Early adopters (i.e. second wave, 6–12 months). I would imagine that most of the firms that we have spoken to would fall into this bucket over the former. You agree with what Proof is trying to do, and you believe that understanding market microstructure and measuring trade execution performance are important, but your firm does not have the appetite to be a pilot user. You would like to be on the cutting edge, but you need hard evidence that Proof’s algos are highly performant and well-designed before you can engage. We would to love to catch up in the near term to go over your existing trading workflow and how you measure success. Then, if and when we get to the point where we do have compelling performance data, we can proactively reach out to start serious conversations.

What we’ve accomplished in 2 years

• Built a high performance cloud-based institutional equity trading platform from scratch.
• Developed novel approaches to measuring execution performance, volume prediction, pre-trade analysis, market simulation, and information leakage prediction (and published all of our research).
• Built several tools: pre-trade, Find My Fills, market structure primer, market data cost calculator.
• Obtained a broker-dealer license.
• Published 42 blog posts with 40,000 combined views — not bad for such a niche/technical space.
• Assembled a fantastic team of engineers and quants (1, 2, 3).
• Raised $4.65M.

Major updates from Q4 2020

• Completed all necessary technology work and external integrations to go live, and Proof Services LLC, our broker-dealer subsidiary, executed its first trade on 1/4/21.
• Received IEX Membership and certified with Apex, CS, IEX, OATS, and CAT.
• Published a significant amount of content including research papers on our VWAP and pre-trade analysis and a blog post on what we’re hoping to accomplish with Proof.

Goals from our previous update

Technology

Complete integration with our clearing partner, our DMA partner, IEX, OATS/CAT.

• (9/10) While we are functionally integrated with every external partner necessary, we need to continue to automate and streamline the post-trade processes

Release production trading system.

• (9/10) As mentioned above, we have successfully launched the system in production. We need to put in some work to harden the environment and create a repeatable and automated deployment process.

Regulatory

Remain in compliance with all regulatory requirements.

• (10/10) We believe we have been meeting all of our regulatory requirements, and it is of course mandatory, not just a goal, to continue to do so in perpetuity.

Product/Research

Finish the day one algo design, its implementation, and testing.

• (8/10) We have designed and implemented our day one VWAP algo, and are nearly finished with a robust testing process for its implementation. For our second algo, we have implemented a major upgrade of our research environment that will allow for more nimble and generalizable experiments from this point forward, and we are now in its final design stages.

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.

• (3/10) We’ve made a first pass at some tests we’d like to run on our trading data, most of which are inspired by our work on modeling information leakage.

Release a public-facing pre-trade analysis tool along with thorough documentation of its design, based on our research on historical data.

• (10/10) We released the pre-trade tool in late October, accompanied by a fun blog post and an extensive whitepaper.

Sales

Onboard initial customers.

• (7/10) We made substantial progress onboarding our initial pilot customers in terms of completed paperwork, account opening at Apex, and EMS integration, but we’re not at the finish line yet.

Perform first live customer trade.

• (0/10) As mentioned above, we’re only a couple weeks away but we still haven’t completed our first customer trade.

Increased focus on buy side engagement and producing content.

• (7/10) We did have a productive quarter, particularly in terms of content, but we hope to do even better now that we are finally in a position to put our algos in customers’ hands.

Operations

Sign clearing agreement and integrate with clearing firm.

• (10/10) Completed.

Become a member of IEX and complete integration with DMA partner.

• (10/10) We received IEX Membership, and completed integration testing with IEX and CS in December 2020.

Connect to day one customer EMS providers.

• (4/10) EMS integration is well underway, and we are especially close to the finish line with the our first pilot customer’s EMS. The largest remaining step is establishing connectivity, and we expect to execute a contract with our preferred FIX network provider by the end of this week.

Goals for the next 3 months

Technology

• Harden production environment and deployment processes.
• Automate post-trade processes.
• Integrate with EMSs used by our pilot customers, including any required FIX networks.

Product/Research

• Finish design, implementation, and testing of our second algo.
• Publish research/content on information-leakage metric, intra-order trading model, and algorithm design.
• 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.

Sales/Marketing

• Go live with initial pilot clients.
• Connect/reconnect with potential pilot and early adopter clients.
• Launch a new website and a new framework for how we think about progress and goals going forward.
• Expand upon our article on how to obtain a b/d license to create a multi-part series covering what it takes to start an institutional equities broker-dealer from scratch (e.g. technology, team, vendors, financials, etc).

Operations/Regulatory

• Post job listings and ramp up interviewing for senior sales, technology, and operations roles.
• Productionize/automate ongoing regulatory and compliance requirements.

Progress Summary