Vanguard Pilots Blockchain for Index Data Management

To manage an index fund, Vanguard needs to capture “timely, accurate index data” that is “constantly ready to go and reflective of what the index provider says the index should be,” says Warren Pennington, a principle in Vanguard’s investment management group. The asset manager identified this as a “relatively manual and inefficient process long ago”—and a problem that is not unique to Vanguard. “It’s across all index providers, and it’s manual and somewhat inefficient on both the index provider’s side and the subscriber side,” he says. 

Index data is currently delivered through a “broadcast model” whereby index providers broadcast their index data in different formats to subscribers, Pennington says. If subscribers have questions about a particular index data point or disagree with a particular change to the index, they begin a dialogue with the index provider. 

Vanguard looked at technologies currently in the market that might support more streamlined process, and would also help automate “those back-and-forth discussions” between index providers and clients. “When we looked for those sorts of technologies, we saw that blockchain with smart contracts on top is a networked technology that would support this,” Pennington says. 

Using smart contacts means that “Basically, you can put processing, you can put logic into the network, and that helps us automate. If you can automate, you have helped increase efficiencies, and it would then potentially address some of the manual processes that we all have to take care of in order to keep our index data up to date. That’s how we chose this, and then we said ‘Let’s look at a partner who is closely aligned with us, has a lot of information that we use and represents a large chunk of our assets,’ and that was how we picked CRSP,” he says. 

The information that will be updated through the blockchain is company names, prices and the calculations. “The idea for us is that… during trading hours, we’re constantly monitoring to make sure we have the most up-to-date version of the index. Currently, there is no good mechanism to do this. We have to monitor multiple different private websites and look for updates that are posted. We then have to read them and interpret them, and then we have to apply them to our index data on our internal systems,” Pennington says. “That’s the inefficiency that we really were excited about tackling with this project and with blockchain and with smart contracts…. That’s what we did, and that’s what this constant streaming real-time updates to a blockchain network eliminates. They eliminate the need to monitor those manual updates on a website: We simply get new data directly into our database, which then we can use to feed our systems.”

Focus on High-Value Tasks

Monitoring for new updates is a core part of Vanguard’s current operations, though making the processes more automated won’t affect jobs, but will allow portfolio managers to focus on more “complex” tasks. “If we can eliminate some of these more repetitive, relatively simple processes through automation, then we can keep the same amount of people, but have them be more focused on the more complex, higher-value things that we do—and that would give us the ability to catch up on some other areas that we want to tackle,” Pennington says.

Vanguard has been piloting the technology “for several months” with 17 funds in total, and will be expanded to include other market participants in the future, which Pennington says could have a big impact on the marketplace. 

“If you think about the use of index data—whether it’s a benchmark for an active manager, or an index for a passive manager—it’s widespread. The efficiency gains for the entire capital markets are really substantial,” he says. “We’re excited about that and continue to look at things like this that we can involve the broader marketplace in. We want this to be something that can be open to all participants in the capital markets. We look forward to broadening this out to the wider group.”