Blockchain ‘track-and-trace’ tech could tackle data compliance, audit exposure, experts say

​Distributed-ledger technologies could help solve the age-old issue of tracking, reconciling, and reporting market data usage by financial firms.

Firms have relied on a combination of entitlements systems—most notably Refinitiv’s Real Time Data Access Control System (DACS)—usage tracking and inventory management platforms to reconcile costs against consumption. Additionally, data providers—exchanges, interdealer brokers, data vendors, and index providers—regularly employ audits to ensure clients are complying with the usage terms in their contracts.

But with financial firms’ data staff already stretched thin, the industry is increasingly looking to automate these functions. Meanwhile, with firms seeking to leverage new data types and delivery mechanisms, the challenge of tracking all data movements and consumption is becoming ever more complex. And without systems in place to capture these movements and consumption, especially given the growing volume and complexity of data types, firms have little hope of accurately reporting usage to providers, or of adhering to the contractual terms of their data licenses.

“Tracking usage across multiple entities within an organization has been a challenge for the industry,” says Robert Wallos, chief innovation officer at West Highland Support Services, who joined the company recently from Hewlett Packard Enterprise, where he was a technology strategist for financial services. He has also served as global technology director at Thomson Reuters and global head of market data architecture at Citigroup.

“Firms can be very efficient about doing that for billing when it comes to individual companies, but banks consume hundreds or thousands of sources of data—from FTP feeds, real-time feeds, email distribution, and from portals. They’re overwhelmed, and this can be very expensive. So, having an efficient means of managing that access going forward will be essential.”

For some other companies, the challenge is still more basic, says Bernardo Santiago, CEO of S4 Market Data, a Miami-based market data management and cost control consultancy.

“The problem I see frequently is that firms don’t know where data is going. Sometimes they can’t identify who the end user of that data is, or whether anyone is actually picking up that data, which makes firms cautious about shutting off any data because they don’t know what the downstream impact is,” Santiago says.

This exposes consumer firms to two potentially costly liabilities: Not only does it leave firms at risk of not properly complying with their data license agreements, it also makes it harder for them to effectively address their data spend and identify potential areas for savings—say, by eliminating unused, under-used, or duplicative services.

“The financial sector has addressed this problem by adjusting commercial arrangements, saying, ‘I don’t know where you’re using my data, so I’ll structure contracts in such a way so I don’t need to know,’” Santiago says.

But while some data providers may take this approach, most demand precise usage records, since their revenue depends on how many clients use their data. Now, some are touting this dilemma as a practical use case for distributed-ledger technologies, including TradeX, a blockchain-based data-tracking startup founded by former CME executives with career histories in the security and defense industries.

TradeX CEO, Drew Orsinger, co-founded the company last year with his brother Trevor, who serves as COO, and enlisted experienced market data technology engineer Charles Porter as CTO.

Last month, TradeX rolled out the first production release of its platform—which can be deployed on-premise or in the cloud—and began a beta testing program with a handful of pilot firms, including a bank, an exchange, a software vendor, and a hedge fund, all looking to use it to address market data compliance and commercial issues.

“The foundation we’ve built has an immutable ledger, which classifies a ‘transaction’ as any type of action internally between two entities, such as distribution of—and permissioning for—data. It’s a general-purpose ledgering platform, and on top we’ve built a reporting and user management platform that records every transaction—every download of data,” Porter says. “We can sit on top of internal data lakes and track data usage, and where data is going within an organization.”

Clients can use TradeX’s APIs or web application to add or delete individual users in the system, and to denote who has permission to view what datasets and for how long, based on individual user rights, the profile of their role, or by groups. The platform also provides highly detailed “forensic” insights into usage, by recording actions such as whether someone receives a file, and whether they open a file, down to the keystroke level.

“TradeX should put firms in a position of knowing where their data is going, because if you’re not set up in their platform to see data, you don’t see it,” says Santiago, who spent 20 years in market data and technology roles at banks and asset managers before founding S4, and who serves as an advisor to TradeX. “What they’re doing with blockchain to ‘watermark’ data will make a lot of people ask what other areas they could use this to improve.”

TradeX envisages five types of use cases where its DLT offering could benefit market data workflows: monitoring data distribution across different mechanisms, providing actual usage analytics on trials of new datasets, supporting regulatory reporting and compliance, data optimization, and data security.

“We can handle all five use cases with the same software. It’s the same deployment of our ledger, just adapted for different uses,” Orsinger says.

The granular nature of its transaction-tracking capabilities means that besides areas like license compliance, the TradeX platform could also be used to definitively establish how much individuals use a dataset or service, which firms could use during negotiations to justify price reductions.

Similar approaches are already used in other industries, notably defense and intelligence, where information can literally have life-or-death implications, says one industry observer. “With a classified computer network, every piece of data is a record, and must be tracked everywhere it goes,” this source says.

In addition to compliance and optimization at consumer firms, TradeX can also support data sources, such as the exchanges involved in its beta phase, as well as firms seeking to exploit the growing trend of companies seeking to monetize proprietary datasets, and has already begun some pilot projects with brokerage firms.

“Brokers have data but are giving it away to trading customers and vendors, when they should be selling it themselves,” Porter says. “TradeX provides an immutable record of usage. Once you trust that as a source of truth, your commercial agreements become less complicated to manage.”

Simply put, if every transaction is approved using encrypted keys in accordance with pre-defined user profiles, and recorded and tracked in an indisputable usage report, data usage should be 100% in line with the terms of a firm’s license. “If your data goes over TradeX, data providers can remove the audit clause in their licensing agreements,” Orsinger says.

Sources say most banks have blockchain strategies in place, but that these are generally still in the “skunkworks” stage—i.e., being researched by small internal groups. A practical use case that can reduce data complexity, simplify tracking, potentially eliminate liabilities, and aid monetization could provide adequate incentive to accelerate those strategies. And if firms aren’t tempted by the “carrot” of monetization, then the “stick” of potential audit exposure may spur these initiatives forward.

“Being on the wrong end of a data audit is not a fun place to be,” Wallos says, “so an immutable record like blockchain could make that much easier.”