Data Provenance In Every Click
Imagine a data storage system that automatically keeps track of provenance for each piece of data – where it came from, who created it and when, whether it has changed since being created, if so when and by whom. It would be useful in many scenarios – the greater the value of the data itself, the more important its provenance. In the world of finance, data provenance is often critical, especially when high-stakes decisions are being made.
This article builds on the live trading use case by exploring additional specific benefits to the system architecture previously outlined, and how each one can be implemented using Fireproof.
Regulatory audit of complex derivatives
The first new scenario is regulatory audit of complex derivatives. When trading complex derivatives, regulators may request a detailed breakdown of how prices were calculated. Data provenance allows traders to demonstrate the exact inputs, models, and calculations used to price these instruments. Fireproof's immutable audit trail can show regulators the precise sequence of data transformations, from raw market data to final pricing, including any adjustments made for illiquidity or counterparty risk.
This transparency is essential for compliance and can help avoid regulatory fines or trading restrictions. For more information on this topic, refer to this PDF published by the Association of International Certified Professional Accountants – Auditing Derivative Instruments, Hedging Activities, and Investments in Securities.
Options market making
Next is options market making. Options market makers continuously update their prices based on underlying asset movements and changing market conditions. Data provenance is vital for tracking the inputs to pricing models and ensuring that quotes are based on the most current information.
With Fireproof, market makers can instantly verify the source and timestamp of each input, from underlying asset prices to volatility measures, ensuring that their quotes remain competitive and risk-managed even in fast-moving markets. If you’d like to learn more about the role of market makers in options trading, this guide is a good place to start.
High-Frequency Trading
The final one we’ll look at today is High-Frequency Trading (HFT) strategy validation. HFT strategies operate on microsecond timescales, making data integrity critical. When auditing the performance of an HFT algorithm, data provenance allows traders to reconstruct the exact market conditions and data inputs for each trade. Fireproof's architecture enables traders to verify their algorithms received and acted upon accurate, timely data.
This in turn enables traders to detect any discrepancies between expected and actual performance caused by data issues, as opposed to a flaw in the strategy. The world of HFT is perilous and exceedingly complex – this blog post lists out four of the top reasons why HFT firms fail. Fireproof can directly alleviate one of them – the technology, and provide an edge in the others.
These three are not the only examples of where realtime, local data provenance can benefit trading desks. Others include risk-parity portfolio rebalancing, Credit Default Swap (CDS) pricing, and algorithmic trading backtest validation. We’ll explore these and other scenarios in the future. In the meantime, find us online if you’d like to share your thoughts, or learn more about how Fireproof can help you realize these outcomes!