Provable Markets emerged in July 2021 as an Approved Submitter for the proposed Securities Finance Transaction (SFT) Clearing Service being developed by US post-trade giant the Depository Trust & Clearing Corporation.

As the second Approved Submitter after Broadridge, the New York-based fintech couldn’t be more different from its vast predecessor, but Provable Markets has a clear plan to leverage new technology to deliver efficiencies in the underserved securities finance market.

The story begins for the company in early 2018, when sibling firm Provable Labs was founded by Thomer Gil, an MIT computer science graduate with a track record of successful start-ups. Inspired by research originally performed at Harvard University, Gil sought to apply a set of advanced cryptographic techniques collectively known as secrecy-preserving computation to counter information leakage in financial markets.

Co-Founder and CEO of Provable Markets, Matthew Cohen, was similarly looking to help address some of the inefficiencies he had encountered during his 15 years as a trader with Bank of America Merrill Lynch, Jefferies, and, latterly, Nomura.

In early 2020 he was introduced to Gil through VC investor Anthemis, who, along with Inkef Capital, has been with Provable since its inception. That introduction was the start of Provable Markets, the commercial arm created to leverage Provable Labs’ cryptographic technology directly in the financial industry.

The long-term goal of the Provable companies is to “be the financial equivalent of the S in HTTPS,” according to Cohen. “Nobody in their right mind trusts web transactions unless they are encrypted. We envision a similar paradigm shift in finance: the application of powerful cryptographic techniques such as secrecy-preserving computation increases trust and removes friction, while efficiently supporting and enhancing the full range of complex functions in the market.”

In its early days, Provable Labs leveraged its engineering talent to construct its first product, an equity block trading tool that uses Multi-Party Computation to provide provable secrecy and fairness.

Cohen told Global Investor: “When Thomer and I teamed up, we immediately started talking about the funding markets and securities lending. Whichever asset class you are talking about, information is shared whether it is in the financing space, cash trading, or elsewhere. Sometimes it is necessary to complete a trade, even though you might not want to share that information openly.”

Cohen added: “Back in my time in the structured financing markets, we’d be building trades for big clients and would eventually have to fund it off our own balance sheet. An outsider with a view into what’s being funded could quite confidently surmise that, ‘Merrill is funding 10% of XYZ, and based on their history could narrow down possible clients’. The point being; this is just one example of the many layers of information leakage beyond the point of trade. This is what is so intriguing about our products: this technology can be applied at all levels of the market structure.”

Jumping forward to the present: Provable Markets is now deploying technology to allow securities borrowers, lenders, and synthetic traders to trade more effectively. “Our long-term goal is to give traders - that currently sit on separate desks and have overlapping mandates - the ability to push a button, and say: I just want the best price, period. I don’t care if it's swap, options, or cash SL. As long as it is executed and cleared in a comparably seamless process, then I get the best execution and experience for myself and the team that supports me.”

The chief executive feels that the recent disruptions linked to the March 2021 collapse of Archegos Capital Management, and prior to that, the GME/Reddit phenomena, have served to highlight the existing inefficiencies in the market. Provable Markets seeks to make the underlying markets more resilient to these problems in future.

Cohen understands this is a major undertaking. “It involves bringing together an ecosystem that is now entirely bifurcated. This means it is expensive, riddled with inefficiency, and has highly vulnerable operational risk points. However, this also creates opportunities for the right team to create a scalable workflow solution to an underserved corner of the market. In addition to our deep understanding and pragmatism around the application of cryptography beyond buzzwords, we think one of our core competitive advantages is our engineering team, which is led by Ruben de Vries, CTO of Provable Labs.”

In addition to its engineering talent, Provable Markets is positioning itself as a regulated institutional-grade fintech.  It is in the process of obtaining approval from FINRA and the Securities and Exchange Commission (SEC) in the US to operate an Alternative Trading System (ATS).

Cohen said: “Our view is that doing this for the institutional market requires being regulated. The regulators are going to do what they are going to do no matter what, so trying to shortcut that just brings problems later, both for ourselves and for our customers.”

The Provable Markets chief cited as examples of creeping regulation Europe’s Securities Financing Transactions Regulation and Central Securities Depositories Regulation, as well as an increase in focus on new or amended rule proposals from FINRA, the SEC, and the Commodity Futures Trading Commission into securities lending and swaps.

He added: “There is no rule that says a product built for participants cannot serve to support regulatory demands as well. As a regulated entity, and more specifically an ATS, if we can improve our customers’ workflows and friction points, while also being thoughtful to support a stronger market structure, assisting in the regulators jobs of ensuring stability and fairness; we can tackle two problems at once.”

The other moving part, of course, is the DTCC SFT Clearing Service, which must be live before Provable Markets can open.

Cohen said: “We are under no illusion that we are to come out of the gate sprinting. The fact is we are selling the DTCC and their SFT offering as much as we are selling our own. We are content with this dynamic because we genuinely believe in what the DTCC is doing, and the benefit their product brings to the market.”

The Provable Markets chief said he and his team have been talking ahead of launch with about 80 firms “covering the whole gamut; from traditional players, to operationally blocked fringe use cases, and new smaller start up participants.”

In August, the Firm hired Euronext’s former head of US platform sales Halima Butt, as the firm’s New York-based Head of Strategy and Sales.

He continued: “As to traction, we feel there is a good portion of the market out there that wants to be first movers, including one or two anchor lenders with meaningful assets to rest as a source of liquidity. Through our partnership with the DTCC participants get the ability to centrally clear and reduce exposure from 100 counterparties to one. This creates an immediate Risk-Weighted Asset (RWA) benefit, and significantly reduces operational burdens and risks. The day no longer starts with each participant’s back office fixing breaks for two hours every morning."

He is also mindful that some firms will be resistant to a new securities finance platform. “There are certainly people that want the market to stay the same, and that’s understandable. We feel we have a nice mix of participants who are like-minded and want to be first movers because they see the obvious benefits from various perspectives.”

Cohen added: “The starting point for us will be getting those first movers on our platform, Aurora, getting some term trades or some chunky long-term positions novated over and helping the DTCC prove the concept. We don’t think that will be hard, so long as we do our jobs well.”

The chief executive believes cryptographic technology can be applied in other underserved markets beyond securities finance. “Advanced cryptographic techniques, such as secrecy-preserving computation, will have a bigger, more fundamental role to play in the market.”

He added: “We are not looking to drastically change behaviour overnight, but in the medium and long term we want to do more than inch the market forward solely with improvements on existing processes. If there is a digital improvement we can deploy - great. If assisting in making traditional, analogue methods is more practical - also great. Doing this deliberately and successfully allows us to expand step by step, creating solutions for the market for years to come."