Reasons not to try Proof

The day after Allison and I left IEX in December 2018, we put up a blog post announcing our intention to build Proof, and we blasted it out to our friends, family, and industry contacts. That kicked one of the most fun periods in the company’s history. All we did for a month was catch up with our network and talk through our nascent plans. Many industry folks we spoke with were somewhat dismissive of the idea; traders are a skeptical bunch, and rightfully so. We were told the US equity execution space is mature, competitive, commoditized, shrinking, and uninteresting. It would be brutally hard to crack in, and even if we did, the payout would be modest. Some buy-side folks said US equities were straightforward to navigate, but they could use more help executing in Asian equity markets, or Brazilian, or fixed income, etc. “That market is messed up; US stocks are easy.” And of course several people encouraged us to do something cryptocurrency-related, particularly given Allison’s theoretical cryptography background (not the same thing!). There are surely opportunities for disruption in all of those other areas, but US equities are what we know best. This market may be mature, but it’s still opaque and conflicted, and the high barriers to entry dissuade disruptive newcomers from nudging it in the right direction. Given our experience with IEX, we now know that it is possible to crack into a mature industry with powerful incumbents and make a positive difference. But we also know that achieving true scale and becoming a major player is extremely challenging. With Proof, we believe we can achieve the former again, which would be a tremendous accomplishment in and of itself. And if we do get to that point, we should have a real shot at achieving the latter.

Proof is now approaching its biggest inflection point: launch. Up to this point, knock on wood, everything has gone to plan: assembling the team, raising capital, obtaining regulatory approval, designing and building the core technology platform and quantitative models, and choosing clearing and market access partners. Assuming the technology/model testing and final integration with those partners goes smoothly, the next big questions are:

1. How well will the product actually perform?
2. Can we convince customers to try it?

For the first question, we have a lot of confidence given our past experience, but we’ll hold off on making any claims until we see the actual performance numbers from live trading.

For the second question: as we gear up for launch, our prospective customer outreach is becoming more frequent and more concrete. As I mentioned earlier, traders tend to be very skeptical of brokers. They get pitched on new bells and whistles constantly, and sorting the wheat from the chaff is no easy task. In our typical spirit of transparency, we figured we would share the most common and the most compelling reasons we’ve heard why a buy-side firm might be reluctant to try out Proof’s execution algos.

The purpose here is not some cheesy twist: “here’s why our weaknesses are actually strengths.” Nor do we even defend against these points in this post. We haven’t closed up shop nor pivoted to another business idea, so we clearly think we have a solid value proposition despite (and solid counter-points to) these potential concerns. The main purpose of this post is just to provide a look into how difficult it is to build and sell into the mature, highly competitive space of institutional equity trading. Anyway, I’m sure if and when we establish a beachhead, our competitors will be selling against us with all these reasons and more, so there’s no point to burying our heads in the sand.

Without further ado, the best and most common reasons we’ve heard not to try Proof:

• “The large banks spend $50–100M every year on technology alone. How can a startup with a tech budget a tiny of fraction of that size ($1–2M) build a competing product?”
• “Large banks have their own dark pools and central risk books, and that access to additional favorable liquidity allows them to provide better execution.”
• “We have already put in the time and resources to scrutinize our brokers’ routing performance, and we’ve already customized our experience with all of them to eliminate sub-optimal practices (e.g. venue selection, counter-party filtering, etc.). Proof is better off going after clients who aren’t in a strong position to hold their brokers accountable, where this low hanging fruit of bad routing practices still exists.”
• “We’ve worked hard to squeeze our brokers on price all the way down to X (e.g., cost + 5 mils). Proof should go after clients who are still paying 1–3 cents per share.”
• “We rely on our brokers for additional services such as research, corporate access, market commentary, block liquidity, trading ideas, and capital introductions. We don’t have extra trading flow to divert to an execution-only broker.”
• “It’s too risky to use a brand new, unproven technology platform. If a bank has a trading/technology failure that results in bad executions, I know they have the balance sheet to make us whole. If your algo goes rogue, I worry we’ll be left holding the bag.”
• “Execution is a lower-order term. We have more pressing concerns than optimizing execution.”

Hopefully this post doesn’t scare prospective customers away, but it’s probably best for everyone if our clients carefully consider all of the reasons to be skeptical early on, rather than getting caught off guard at the eleventh hour. Maybe we can even incorporate these into our sales pitch, like Flywire with fundraising.

Are there other good reasons we missed? Please send them our way!