Provable Markets
Matthew Cohen, chief executive of Provable Markets, speaks to Bob Currie about the benefits that their vertically-integrated ATS is bringing to securities finance and how cryptographic research is driving their approach to product design and development over the medium and long term
The New York-based broker-dealer and alternative trading system (ATS) Provable Markets was initially preceded by its R&D arm and engineering team that was founded in 2018 by MIT-trained engineer Thomer Gil. Together, the commercial and engineering teams are seeking to bring together cryptographic research and emerging computational advances, with practical experience held by seasoned financial professionals with a deep understanding of securities finance and the broader capital markets infrastructure.
The founding team and advisers brought to the company an impressive track record of building companies from the ground up, with a number of billion dollar exits already to their name. The company is a staunch advocate of standardisation and interoperability within the financial services industry, bringing a direct market access type model to SFT trading and clearing that, it believes, is best served through collaboration with other technology innovators and service partners.
Sister company Provable Labs was formed in the Netherlands in June 2018, drawing on academic work in the field of cryptography by advisers Chris Thorpe, David Parkes, and Steve Willis. Thorpe completed his doctoral research at Harvard in 2007 with an idea for a fully-encrypted dark pool where the order book and matching process are conducted under encryption.
The underlying cryptographic application is called secure multi-party computation (MPC), which enables mutually distrustful parties jointly to perform distributed computation on individually encrypted inputs.
Provable Labs applied this technology to create a novel matching engine that enables participants to submit their full trading interest into an encrypted order book without disclosing their intended execution goals — even to Provable — thus eliminating pre-trade information leakage.
While institutional investors have long had access to alternative trading systems that enable them to execute block trades, parties remain concerned about leakage of trading information — meaning that key details of their trading strategies may be revealed to others and that knowledge of their liquidity and trading structures can impact pricing, creating market movements that may be exploited by other trading participants.
On completing his PhD, Thorpe authored a series of white papers on potential uses of MPC in capital markets. Recognising the potential that this application could offer in a trading context, the work was discovered by a large Dutch pension fund which sought to bring this academic concept into practice.
Cohen joined the company in 2020, looking more deeply at how these computational models could be applied to the broader financial services environment. Drawing on his trading experience at Bank of America Merrill Lynch and MD positions at Jefferies and Nomura, he focused particularly on areas where risk and inefficiency persists in a trading context due to incomplete data sets. “From the outside, there is always a tendency to assume that financial markets operate more efficiently than they do,” Cohen observes. It took a trader’s experience, with a solid grasp of technology solutions, to recognise some of the most pressing use cases where these computational advances could be applied more widely.
SFT clearing service
From its inception in 2018 until Cohen joined two years later, the company was centred around a core of highly skilled software engineers based in Amsterdam. Provable Labs was led by Gil, who had previously been CTO of successful non-financial startups, and the firm's chief technology officer Ruben de Vries. While their initial implementation focused on block trading, the team recognised that the ability to perform complex matching algorithms under encryption could quickly expand to a much wider range of use cases.
Since then, Provable has built full stack securities lending infrastructure from scratch, all accommodated in one modern and integrated cloud-based platform. “We call our current, live product a vertically integrated Alternative Trading System,” says Cohen. “We emphasise vertical in that, together with trading functionality, it offers significant post-trade efficiency by pre-matching position details, eliminating — among other historical inefficiencies — the need for overnight batch settlement and T+1 reconciliation entirely. We are designed to serve the needs of the front, middle and back office.”
In November 2021, Provable Markets was accepted as a broker-dealer member of the Financial Industry Regulatory Authority (FINRA) and, several months later, the firm also registered its Form ATS with the Securities and Exchange Commission (SEC).
In October 2022, Provable Markets confirmed the completion of the first securities lending transaction cleared through the Depository Trust and Clearing Corporation’s (DTCC’s) new Securities Finance Transaction (SFT) Clearing Service. The firm is one of two approved submitters, alongside Broadridge, into the DTCC SFT clearing solution.
The trade was executed on Provable’s ATS, Aurora, and centrally cleared and settled via the SFT Clearing Service on 6 October. To support seamless processing, Provable Markets has established an alliance with FIS to enhance user connectivity to the DTCC SFT Clearing platform. The partnership integrates Aurora and FIS’ Securities Lending Processing Platform — previously known as Loanet — and its related product suite.
Cohen explains that this partnership has enabled National Securities Clearing Corporation (NSCC) members, and sponsored access firms that are customers of FIS Loanet, to connect to DTCC’s SFT service with little disruption to their existing workflows. With this, trade positions are updated in the book of record held at Loanet Accounting and Settlement in close to real time.
“Customers are best served when providers collaborate to make the process low lift and low cost,” explains Cohen. “In contrast to other market structures, the concept of a new system or vendor in securities finance comes with immediate concerns about underwriting a big build or contract. Quite bluntly, we feel this shouldn’t be the case, and we’ve proved the possibility with this relationship.”
One of the primary drivers, Cohen notes, is to bring efficiencies from electronic cash equities trading and other mature markets into the SFT realm. Aurora is designed to be flexible and interoperable with other execution platforms, enabling users to access trading liquidity from multiple sources and ensuring that the broader securities lending infrastructure is no longer vulnerable to single points of failure.
In doing so, Provable Markets has embedded front, middle and back-office procedures into a single solution, offering automation across the SFT lifecycle. This also offers advantages to the trading desk, where Aurora can deliver central order book style trading to securities finance trading, while also delivering major benefits in RWA reduction and balance sheet efficiency.
Having established this integrated SFT infrastructure, the management team is now reviewing the next step in the company’s evolution. “We offer a significantly broader product set than we did 12 months ago, built upon a foundation of execution and settlement workflows that reset a broken market structure,” Cohen argues, “and our approvals allow us to develop trading and post-trade support in swaps and options trading, providing wider access in synthetic markets to meet securities finance trading outcomes.”
This will form one element of the firm’s plans to extend its solutions coverage — shaped by consultation with clients and across its working groups — but Cohen is clear that the expansion programme should remain focused and lean, without delivering any unnecessary features that the market might not use.
“This approach underpins our working culture and mindset, to always be pragmatic and open in our decision making,” comments Cohen. “In our initial engagement, clients might be fearful that a highly feature-rich solution may take six months to install,” explains Cohen. “However, our engineering team is mindful that solutions do not always need to be done in an overly complex way, and that often leaner and more streamlined technology may result in the best outcome by focusing on solutions that deliver the most impact for our clients.”
In delivering these objectives, Provable Markets is willing to collaborate with other firms that serve complementary workflows and that its customers would like the firm to work with. “Our partnership with FIS has been valuable in helping participants of all sizes seamlessly reap the benefits of the DTCC’s SFT Clearing service,” says Cohen.
“In this respect, our focus has been on working to save back-office overhead through straight-through processing,” he continues. This is one area in particular where Provable Markets has sought to establish additional partnerships. The company anticipates announcements of such projects over the coming months.
Vertically-integrated ATS
SFT asked Cohen to elaborate on which features of the Provable Markets solution have been most compelling to its broad constituency of users. The list includes benefits to the SFT trader with DMA-type access through Aurora; the ability to promote an STP workflow from pre-trade across the transaction lifecycle; and the offer of RWA and capital efficiency benefits. Embedded in the architecture, solutions are also available today for pending regulatory items, in particular T+1 recalls and 10c-1 compliance.
“It has been a mixture of all of these elements,” Cohen responds. “Many customers are attracted to our ability to provide a centralised order book for SFT trading, which expands to new and valuable opportunities for automation.”
Bank clients are heavily focused on capital efficiency and capacity to offer RWA savings associated with their SFT trading activity or provision of agency lending services. A noteworthy feature of the DTCC SFT clearing solution is that the agent lender can also participate in this cleared SFT ecosystem and Provable Markets is working actively with the agents, DTCC, and their counterparts to find the right model to support scalable SFT access to a cleared environment.
To strengthen its hand, the company has made some judicious appointments to its senior team, with Halima Butt, former head of US platform sales at Euronext joining as head of strategy and sales in August 2021, and becoming Provable Markets’ chief operating officer just over a year ago.
In April 2022, it brought in Rachel Andreassian from Liquidnet to head its product and market structure team, deepening its pool of expertise in electronic equities trading and workflows.
To run the sales function, Brian Foley was appointed as the firm’s managing director for sales in March, having previously been a founding employee of both Liquidnet and IEX.
Ramping up volume
It can be a tough infancy for an emergent fintech working to establish itself in the capital markets — with young companies facing a constant challenge to prove their worth and to justify strategic choices at each stage on the journey.
Against this background, Cohen highlights the importance of support from its investors, venture capital companies Anthemis Group and Inkef. It also has support from a network of investors that “have lived and breathed” the financial services world over their distinguished careers, mainly as hedge fund executives or as technology specialists. “It takes a long time and plenty of patience to build an enduring business and we are appreciative of the continuous support in this context that has enabled the company to grow properly,” he says.
In driving innovation, Provable’s approach is to move in incremental steps, advancing one step at a time and looking to do each as well as possible, informed by incorporating constant feedback from clients.
In the short term, the focus is to ramp up volumes with its initial cohort of customers, growing Provable Markets as a business and bringing more flow into the DTCC SFT Clearing service, while at the same time demonstrating the broader benefits the system architecture offers for day-to-day financing workflows.
“It is important that we are moving with the needs of our users, but also that we build volume and scale the solution,” says Cohen. “Only in close coordination can we fully leverage our existing pipes and apply standardised workflows to meet users’ requirements, while delivering greater efficiency to the collateral and margin management requirements that may need to be tailored directly to the individual user.”
With this in mind, the team has been reinforcing its ability to work with pledged collateral transactions, to accommodate triparty structures and a wider range of collateral arrangements.
The philosophy of the company, he explains, is to remain open and pragmatic and to build enduring relationships with customers. This involves engaging across the organisation’s front, middle and back office, recognising that actions in each of these areas is likely to generate a reaction across the wider trade lifecycle.
“We have taken pride since our formation in being open at each stage in our development — in disclosing what we have built, what we expect to build and what we will not, while collaborating with industry partners where appropriate to deliver effective solutions for our clients,” concludes Cohen. “We intend to work closely with our clients and the industry to play a key role in the evolution of the securities finance market for many years to come.”
