Proof Trading Progress Update: 21 Months

First the good: Proof Services, our broker-dealer subsidiary, received FINRA approval in mid-July. Our team has been very productive across the board, and on our end we believe we are one pre-launch sprint away from being able to go live trading. We pushed out a great deal of content this quarter, and we have much more coming up in the pipeline.

Now the not so good: we spent the entire Q3 in clearing limbo. We had hoped to do our first live trade last quarter, but that depended on many critical pieces, both internal and external, all coming together perfectly, which did not happen.

We do fully believe that we will still be able to go live by the end of 2020. Once we get the clearing engagement in place, that kicks off client onboarding, EMS integration, and exchange membership, and we still need to make our final tech push, but at least there is light at the end of the tunnel!

Major updates

• Proof Services LLC, our broker-dealer subsidiary, was approved by FINRA on 7/20/20.
• Our technology platform is day one feature-complete and nearly ready to start executing trades.
• Published a significant amount of content including a research paper on distilled impact and a blog post on obtaining a broker-dealer license.
• We raised an additional $1.5M in September, bringing our total fundraising to $4.65M.

Goals from our previous update

Technology

Lock down individual component interfaces to begin integration by early August.

• (8/10) We’ve either completed or are very close to completing the development on all of the major business components of the trading system, including the OMS, the Market Data subsystem, the Client / Exchange FIX gateways, the UX subsystem, and the Algorithmic Trading Engine. We still have a few loose ends to tie up, such as the integration with our DMA / clearing partner and certain pieces related to regulatory reporting, which should be in place shortly.

Release production trading system.

• (6/10) We have what we need to deploy the system for our first trades, but we’d like to automate and harden certain processes.

Regulatory

Proof Services should obtain all necessary regulatory approvals to go live.

• (10/10) Done!

All Proof Services employees must pass required FINRA exams prior to launch.

• (9/10) The team has passed all necessary FINRA exams for us to launch. A couple of team members have additional pending exams that will enable us to share responsibilities more widely.

Product/Research

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

• (6/10) We have designed and implemented our day one VWAP algo, and identified the main features of our primary algo.

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.

• (0/10) Not yet started, as we are still finishing up the design, implementation, and testing of our core algo for day one.

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

• (9/10) The tool is essentially ready for release. We just wrapped up the design of a novel information-leakage metric that we are incorporating into the tool, and the documentation is ready. We plan to release the tool in the next few weeks.

Sales

Onboard initial customers.

• (0/10) Unfortunately customer onboarding is gating on us onboarding with our clearing partner, which has not yet been completed.

Continued focus on buy side engagement and producing content.

• (7/10) We had increased buy side interaction and produced a substantial amount of additional public facing content this quarter.

Operations

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

• (3/10) We made tangible progress, but we are not where we want to be with external integrations.

Goals for the next 3 months

Technology

• Complete integration with our clearing partner, our DMA partner, IEX, OATS/CAT.
• Release production trading system.

Regulatory

• Remain in compliance with all regulatory requirements.

Product/Research

• Release pre-trade tool.
• Finish design, implementation, and testing of the primary algo.
• Publish research/content on pre-trade model, 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

• Onboard initial customers.
• Perform first live customer trade.
• Increased focus on buy side engagement and producing content.

Operations

• Sign clearing agreement and integrate with clearing firm.
• Become a member of IEX and complete integration with DMA partner.
• Connect to day one customer EMS providers.

Progress Summary

Additional thoughts:

We want to give a brief shout out to Credit Suisse. Proof selected CS as our DMA partner earlier this year after going through a lengthy evaluation of the respective offerings at several major banks. Even though our broker-dealer subsidiary Proof Services can gain membership and access exchanges directly, because nearly every exchange offers tiered pricing, an upstart like us faces dramatically worse economics unless we execute under a larger firm’s MPID. Tiered exchange pricing is a major barrier to entry for new brokers, and this is pretty much the only workable solution. Having now gone through the sales and onboarding process with many vendors and partners across the industry, we have had a wide range of experiences. CS has stood out as genuinely exceptional, both on the technology integration side and on the client service side in terms of professionalism, candor, and helpfulness. They’ve also provided pointed assistance on items well beyond the scope of our partnership. We’re overdue for a full blog post detailing our DMA partner selection process, but in the meantime we just want to say thank you to CS specifically for going above and beyond as we approach launch.