The Wirecutter, but for Institutional Financial Services
Before Allison and I decided to start Proof, we talked through a number of ideas, and one of them was roughly “Wirecutter and/or Yelp for Institutional Trading.” In other words: a public-facing, ultra-transparent, possibly in-depth-researched-by-experts, possibly crowd-sourced, website for reviewing and rating counterparties and vendors in our world.
In my personal life, I diligently research almost every purchase or decision, however small — Wirecutter, Yelp, Tripadvisor, even the depths of Reddit or various niche forums (eg, 1, 2, 3, 4, 5) — it seems for any random hobby or topic there is a thriving online community of hardcore enthusiasts eager to share their experience and wisdom. I’m (hopefully) not quite this extreme, but I could almost be the Dan in the recent NYT article The Tyranny of the Best, a not exactly flattering commentary on “rankings culture.” Nevertheless, I think there is a great deal of value in having the wisdom of the crowd at your fingertips.
Early on with Proof, we participated in the startup incubator Y Combinator, and while we had a mixed experience overall, one of the greatest positives was gaining access to Bookface, basically a private internal forum for founders who have gone through YC. Anytime we face a general startup challenge — e.g. choosing an HR platform, hiring a remote employee in Brazil, diligencing a potential VC investor, how to deal with a Trademark dispute, etc. — we can search it on Bookface and usually find an existing discussion with highly relevant advice. And if not, we can make a new post ourselves and get helpful responses from the community within hours. It has been a fantastic resource, but unfortunately it is only really helpful for general tech startup issues, and not for anything specific to capital markets. Also it is private, which may be good in the sense that participants tend to be more candid and forthcoming, but it also means the benefits are limited to this small community and not the broader public.
Current State of Things
Broker websites
Institutional finance, our industry, is notoriously opaque. There is virtually no public information on who the players are, what their offerings entail, or how they perform. For example, here is Morgan Stanley’s website, and this is the totality of what they say about their electronic trading offering (i.e., the business that we’re in):
“Morgan Stanley Electronic Trading (MSET) offers global electronic access across cash equities, options and futures. Our electronic trading tools include a broad suite of algorithms, smart order routing and direct market access.”
That’s it! Goldman’s website is a little better, but still pretty sparse.
As far as I can tell, JPMorgan’s website barely even mentions that they trade equities at all:
These are three of the largest players in our space, and they put out basically no public information about their offerings.
Industry surveys
There are a handful of industry players who conduct annual surveys, notably Bloomberg, Greenwich Associates, and Chartis. These reports are by far the closest thing to what we’re talking about and they have valuable insights derived from thorough buyside surveys, but they also suffer a couple major flaws:
- They are each locked behind 5- or 6-figure paywalls.
- They are susceptible to conflicts of interest as those being evaluated are also often subscribers, and also these reports sometimes go hand-in-hand with pay-for-play industry awards. As such, these reports tend to be quite friendly to the status quo.
- They only come out once a year or even once every few years.
Conferences and industry trade groups
There are several industry conferences and organizations, but they tend to be self-promotion sell-side and vendor fests, and not something we have gravitated toward. There do seem to be a small handful of diamonds in the rough, but these tend to be more exclusive groups that work hard to keep their membership small and dedicated and to keep the content relevant and genuine as opposed to empty and self-promotional. One example that comes to mind is NOIP, which Allison was recently invited into. It seems like a great organization, but similar to Bookface any benefits can only be realized by their invited members.
Word of mouth
Ultimately, personal networks and word of mouth are the primary way folks seem to learn about the various offerings across the industry. One of the greatest joys of starting Proof has been getting the opportunity to build an incredible network of peers and clients and prospective clients ourselves. We have learned so much just by getting out there and meeting and talking with folks about what we’re doing and learning from their perspective and experience. And by far the most effective marketing for our business has been when our clients have voluntarily recommended us to their peers and done reference calls for us. We feel incredibly fortunate and grateful to have benefited from this aspect of the industry, but it is not exactly a scalable and efficient system.
The Vision
Imagine a public-facing website where you could look up a specific service or segment within the industry, and you would see a list of all the players. You could dig into a firm’s offerings along with customer ratings and reviews (possibly attributed, possibly anonymous), along with details on their pricing, reliability, and customer service. Perhaps the website could have in depth feature articles giving an overview and recommendations for a given offering (Wirecutter-style), or perhaps it would just be completely community-generated like Yelp. Perhaps there would be discussion forums and/or comment sections as well. Businesses could curate their own public profile and provide any information they wish to share in a central location, but ultimately the primary value would come from the customer reviews and engagement.
Benefits
Transparency and Accountability
Financial institutions are incredibly good at maximizing profits from each individual client, often through probably legal, but less than savory tactics. When exposed, the most egregious cases may result in regulatory action (on a several year lag), but most of the time any reputational damage is contained to just that single client “putting them in the penalty box.” Even in those major public cases that do result in fines, usually by the time the news comes out, the offending employees have long-since turned over, and the bank can lay all blame on the “previous regime” and get back to business as usual.
A service like this one could consolidate all client experiences, good and bad, large and small, into a single central, public venue. Problematic findings could be reported in near real-time, and clients could evaluate for themselves the extent to which patterns of behavior are concerning. Conversely, clients would also now have a central venue for highlighting good experiences to help encourage and reward good actors.
This industry desperately needs more transparency and accountability, and a tool like this could be just the ticket.
Partner Discovery / Promoting Innovation / Scaling “Word of Mouth”
You’re starting a new hedge fund and you want to select a prime broker — who do you choose? You probably first scour your network reach out to buddies in similar seats who have made this choice for themselves, along with possible partners you’ve worked with before in some capacity, and then you set up meetings with a bunch of options and pick one. This is pretty inefficient, and would probably leave a lot of stones unturned. A public review platform would help you figure out the landscape much more quickly and efficiently, and it would also help you much more easily discover new entrants into the space who might be a great fit.
Price Discovery
Considering how the US stock market prides itself on having the greatest price discovery, transparency, and efficiency of any market in the world, it is bananas that all of the players in the space are a complete black box when it comes to their pricing. Price discrimination is rampant, and it is extremely difficult to get a finger on the pulse of what most services should and do actually cost. Pretty much the only way to get any color is through word of mouth and from aggregated, selection-biased industry surveys. A service like this could completely demystify pricing practices and better promote competition, fairness, and efficiency.
Challenges
Achieving Critical Mass
Like any marketplace idea, an institutional finance review platform would only really be useful after it has been widely adopted and has a significant number of ratings representative of the community at large. It would not be trivial for the platform to get seeded with this critical mass of upfront content.
Compliance
In this industry, every email, every instant message, and especially every iota of public communication must face the wrath and scrutiny of the overzealous compliance department. Firms tend to be extremely risk averse — e.g., “they can’t fine us if we don’t say anything at all.”
This service would probably need to be monitored and perhaps reviews would even require approval prior to submission, which would be a major friction. Perhaps anonymity or social pressure, or better yet “increased revenue opportunities,” could help loosen the yoke of oppressive compliance teams and allow (vigilantly monitored) participation.
Confidentiality
Unfortunately, many firms in this industry don’t want their clients and prospective clients talking to each other, and especially not talking about them publicly. Many contracts have confidentiality clauses, particularly when it comes to divulging pricing.
We have even had EMS vendors force us to sign an NDA prior to even having an introductory meeting. Mind you, this wasn’t some stealthy, cutting-edge technology company trying to protect its trade secrets (which too would be annoying, but perhaps less so). The EMS/OMS space is commoditized and stagnant, and the vendor in question is probably at the front of the pack in terms of outdated and unimpressive technology. They just wanted to make sure that we would not share even a shred of detail about their egregious pricing with others.
I’m not sure how this service would be able to get around such confidentiality clauses, but given that industry surveys are able to report average pricing in certain cases, this challenge can probably be overcome.
Bias / Fraud
Anyone who has bought an item on Amazon has seen the mountain of fake and/or paid reviews that plague their platform. The more impactful a review platform becomes, the greater the incentive for participants to come up with sneaky ways to juice their own rankings and tank those of their competitors. Anonymous reviews, for example, might help alleviate challenges around compliance and confidentiality, while also encouraging candor, but they could create a much easier path to gaming and fraud. Requiring all reviews to be attributed, on the other hand, might reduce fraud, but users might be less inclined to post honestly (or at all) out of fear of retribution/blowback. There is no obvious best path that solves all of these problems.
Selling Out
Successful review platforms can hold a significant amount of influence at the exact time of a customer making a purchase, which is a very valuable position to be in from an advertising perspective. With this great power comes great responsibility. Unfortunately, not all such platforms have resisted the temptation to abuse such power for personal gain. Yelp in particular has faced numerous accusations of extortion and blackmail, and even Wirecutter which has a fairly good reputation for objectivity has faced criticism for forcing products to “pay-to-play.” It is not hard to imagine ways a review platform in our industry might travel down this dark rabbit hole in the pursuit of monetization.
Not becoming an episode of Black Mirror
Especially if the service incorporated reviews of individual sales or coverage folks, one could see it devolving into a popularity contest, or worse, an episode of Black Mirror, where you don’t just publicly rate companies but individuals. A little scary, although with social media this is pretty much the world we already live in. Oof.
Economic Implications and Monetization
If a platform like this takes off, there are a number of ways it could be monetized, for example:
- Referral/affiliate fees when a client decides to use a service based on the platform’s reviews
- Advertising fees for highlighting and/or preferred placement in searches
- Paid consulting services to advise a company on the competitive landscape and how best to target and serve their clients
Contracts in our world can be for hundreds of thousands if not millions of dollars, so it stands to reason that any player central to such decision-making could leverage their position to collect some sort of rent. The challenge would be to do so in a way that is fair and not extortionary, and that does not compromise the integrity or trust of the platform.
What Proof is doing
Along these lines, we have written several somewhat Wirecutter-esque blog posts describing various vendors we have selected as part of building our company, including a full detailed list:
- Clearing Broker
- DMA Partner
- Algorithmic Trading Database
- Cloud Provider
- Tick Data Research Environment
- Books and Records Archival
- International PEO
We feel comfortable publishing pieces like these because in these scenarios, we are the customer, so our decision making process might be useful to others in the same shoes. We have also published an in-depth Market Structure Primer that gives a general overview of the institutional equities landscape. I don’t think it would be appropriate, however, for us to be the ones to publish an overview of the institutional equities trading landscape, and aggregate buyside reviews of the various players, considering that we are a direct competitor in this space. Maybe we can write a profile/overview of various other adjacent startups in this space, since it is a small, friendly community and we all tend to know each other — this could be worthwhile content, but that is probably the closest we would get.
Conclusion
We would love to be the ones to build a broader reviews platform and maybe we will one day, but ultimately a service like this would be far more trustworthy if it was built as a completely independent and unbiased entity. I mean, who would trust an article titled, “The Top 5 Best Stock Exchanges — You’ll Never Guess Who Didn’t Make the List!,” brought to you by the good folks at NYSE.
But hopefully somebody out there builds this, and if we can be of service to help make it happen please let us know!
