Trading

Reality Stranger than Fiction: JP Morgan and Minority Report

Can you be fired or arrested for a crime you haven’t yet committed, but most likely will? JP Morgan thinks so – and they’ve developed new algorithms to monitor their employees and stop rogue trading behaviour before it happens.

Stay tuned to find out how and why they’re doing this.

Transcript


Amanda: Remember the movie Minority Report? It was a few years ago, and Tom Cruise’s smouldering eyes aside, the general gist of it revolved around arresting people for crimes they hadn’t yet committed, but were going to. Well, reality is becoming even stranger than fiction, as JP Morgan attempts to stop rogue trading behaviour before it happens.

And Tom Cruise doesn’t even star.


Jeremy: In a scene reminiscent of the movie Minority report, the Tom Cruise thriller, JP Morgan is using predictive analytic software to stop rogue trading behaviour before it happens. Let’s discuss.

Archana: JP Morgan has paid $36 billion in legal fees over the recent times, and since the financial crisis – and that’s led to the company unveiling a new algorithm that helps it to pinpoint rogue employees before erroneous trades happen.

Shaheerah: As Archana mentioned, they’ve paid $36 billion in legal bills. One of the famous ones was the 6.2 billion London Whale Fraud. And this both hurts their reputation and it hurts their profits as well. Now if they can actually cut legal and other expenses, the investment bank’s return on equity would actually rise to 13% as opposed to the 10% they made last year.

Jeremy: What kind of data points do you think they’re analysing to predict this rogue behaviour guys?

Shaheerah: Well, there are a lot of factors that will go into this new deduction software, some of them will include: are these workers skipping the compliance classes; are they breaking the personal trading rules; or are they reaching the Market risk limits? The whole point of this software is to predict the themes and the patterns in their employee behaviour, so it’s actually pretty cool. You’re trying to predict how a human is going to behave. And one thing I think is that they should really be keeping an eye on the middle managers and the top-level executives, as opposed to the lower level managers. It’s the top-level executives that have the access to the data, and have the authority to make the decisions, and they know all of the internal systems and controls.

Archana: Algorithmic misbehaviour prediction is apparently a booming business. Again, this all boils down to big data and data analytics which we’ve been talking about of late quite extensively. And going back to what we specialize in as well, so P4Capital we do understand the space and we do have the right kind of candidates who are experienced doing data analysis, and working with some of the latest and greatest in terms of software tools that are out there.

Jeremy: Okay, both of my colleges here have mentioned that JP Morgan has spent $36 billion in legal fees, and this will be a measure to help reduce those fees and reduce scandals that occur, but I think they’re going to be hitting some new legal actions and sanctions against them. When you try to discipline a trader for something that he hasn’t done yet – is that really going to hold up in court? You’re just opening up a whole new can of worms I think.

Archana: Absolutely, I do agree with Jeremy – it is a very tricky space to venture in, but I guess it’s more for the compliance team and the regulators to show to the institutions out there that they have the right kind of checks and balances in place, so that if JP Morgan again faces a similar situation that it has witnessed in the past, it would have its books in order.

Shaheerah: And just apart from this software, they are also spending money as well. So the company has hired 2500 compliance workers, and they spent $730 million over the past 3 years to improve operations. They’re also  equating a special surveillance unit to monitor the other electronic and telephone communication in the investment bank. So if you go back and look at the fraud investigations that they’ve done, a lot of it could have been caught earlier on if they were checking the emails and the phone calls that the employees were having.

Jeremy: Yeah, a company like JP Morgan must have billions of emails going through their systems in a year. That’s a lot of work for 2,500 compliance people to be monitoring. I can see where there’s some value added to automating this to the Big Brother.

Amanda: What if people go outside of JP Morgan, and employees just send emails from their private servers?

Jeremy: That can probably be monitored as well, depending on how they’re using it. I don’t know about the legality of that.

Archana: So in the past JP Morgan and some of the other investment banks as well have used dedicated whistle-blower phone lines and email addresses where workers could actually email anonymously with tips to the management if they do see any fraudulent behaviour. Obviously this is a step up for them in terms of using technology to monitor behaviour of their employees. Also another interesting thing is that this is obviously just part one – the algorithm is just part one of the entire review of the investment bank’s work culture. The second part is obviously is HR and training related – JP Morgan is invested heavily in terms of training their employees and also to identify and fix areas where potential lapses could occur.

Shaheerah: And I also just wanted to bring some more facts to the discussion. It’s a fact that each year more than 30 million consumers actually fall victim to investment frauds – it’s a pretty big number. And the average loss for an investor is about $15,000 dollars, as well as individual losses could be all the way up to millions of dollars. And this happens because there’s nothing really suspicious in the beginning. I mean high returns and the financials seem legitimate, and this could go undetected for years. And it’s always usually in the end when you finally find out, and you start to investigate what has happened.

Archana: The new program that’s actually being rolled out would be tested in the trading part of their business first, and then the bank will spread it out throughout their global investment banking division, as well as their asset management division, and their complete roll out would happen by 2016.

Jeremy: JP Morgan has always been a market leader and they’re one of the première investment banks out there, so I imagine that there’s a bunch of other banks watching with bated breath to see if this experiment works. So only time will tell.


 

That was the P4Capital team discussing JP Morgan’s new initiative of stopping internal banking crimes before they happen. Want to know more? Check out our website  and previous posts at www.planet4it.com or follow us @p4capital. Thanks and see you next time.

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Do Canadian trading platforms need to be modernized for global purposes?

Is Canada falling behind on global trade?

In a world in the throws of the Digital Revolution, the only constant is change.

There are several major trade regulation changes coming in 2014, unprecedented in both number and magnitude.  These changes affect every company that imports into, or exports from, Canada or the U.S.  Some of these regulations require new licensing, and others mandate significant software updates.

Getting trade right is important not just for the economic growth it can create in Canada, but for the signal it sends to North America’s partners.  If North America fails to show leadership and surrenders the chance to be leading the way in the worlds most significant trade partnerships, others will step forward to fill the void. Now-a-days, thanks to the growing powers of Russia, India, Africa and Asia, that void would be filled within moments and be almost impossible to reclaim

Can Canada keep up in that face of all this competition?

P4Capital

Jim:  Over the last few years our trading software has grown stagnant. Oh sure,  the interface has gotten more colourful and interactive, but the core application hasn’t changed at all since it was bought. It’s like you bought a box with a pink ribbon on it. Eventually, the pink ribbon got tattered, so you but a shiny new yellow ribbon on it – but the repair was strictly cosmetic.  The box is still the same. The software that the Canadian banks bought is that box. It was purchased from the late 1980’s to the year 2000. They were able to do whatever they needed to do in those time-frames, but they’ve been lacking for anything new for the last 15 years. In other words, any changes have been strictly cosmetic.

Now you have “giants on the marketplace that were never there before, and those original trading platforms were never made to handle these new behemoths. So the question Canadian traders have to ask is am I happy making the money I’m making, or will these new competitors push me to the sidelines?”

Jeremy: The Canadian trade foundation was based on the 7.5 hour trading day. That model was based on the New York model. In Shanghai today however,  those building never go dark.

When 7.5 hours was the norm, when the ‘bell ends’ traders would take all the results of that day, sum them up, then batch send them to the accounting department. Everyday they would do the same thing and be told by the start of the next trade day how they were doing. Now there is no break in the day for batch updates;  you have to do it in real time. You don’t have an off hour to calculate – so your risk models are lacking.

Archana: The crash of 2010 is a constant reminder of the need and importance to bolster fall-back mechanisms – where the modern systems can apply a hard stop to free-falling stocks. Business is much more complex now than the antiquated systems that were built several years ago. As Jeremy said, stocks are trading 24/7. There is a race to gain supremacy, be it in terms of the overall market reach, or its impact. Not only that, but we are in the midst of a global economy where exchange is happening in multiple currencies. We need a sophisticated system that can counter faulty trades. For us to stay afloat in all of these emerging markets and to be counted as a viable player, our technology needs to be modernized.

P4Capital

What do you think?

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