Wall Street traders are already threatened by computers that can do their jobs faster and cheaper. Now the humans of finance have something else to worry about: Algorithms that make sure they behave.
JPMorgan Chase & Co., which has racked up more than $36 billion in legal bills since the financial crisis, is rolling out a program to identify rogue employees before they go astray, according to Sally Dewar, head of regulatory affairs for Europe, who’s overseeing the effort. Dozens of inputs, including whether workers skip compliance classes, violate personal trading rules or breach market-risk limits, will be fed into the software.
“It’s very difficult for a business head to take what could be hundreds of data points and start to draw any themes about a particular desk or trader,” Dewar, 46, said last month in an interview. “The idea is to refine those data points to help predict patterns of behavior.”
JPMorgan’s surveillance program, which is being tested in the trading business and will spread throughout the global investment-banking and asset-management divisions by 2016, offers a glimpse into Wall Street’s future. An industry reeling from billions of dollars in fines for the actions of employees who rigged markets, cheated clients and aided criminals is turning to technology to police itself better. Failure to do so will provide ammunition for those pushing to separate trading operations from retail banks.
At New York-based JPMorgan, the world’s biggest investment bank by revenue, the push comes after government probes into fraudulent mortgage-bond sales, the $6.2 billion London Whale trading loss, services provided to Ponzi-scheme operator Bernard Madoff and the rigging of currency and energy markets.
The company has hired 2,500 compliance workers and spent $730 million over the past three years to improve operations. Job postings show it is building a surveillance unit to monitor electronic and telephone communication in the investment bank.
E-mails, chats and telephone transcripts can be analyzed electronically to determine if employees are trying to collude or conceal intentions, said Tim Estes, chief executive officer of Digital Reasoning Systems Inc.
“We’re taking technology that was built for counter-terrorism and using it against human language, because that’s where intentions are shown,” said Estes, whose company counts Goldman Sachs Group Inc. and Credit Suisse Group AG as clients and investors, but not JPMorgan. “If you want to be proactive, you have to get people before they act.”
Automated surveillance is necessary for Wall Street firms because billions of e-mails flow through each bank annually, overwhelming the ability of people to monitor them, according to Estes. Still, technology that predicts behavior, as in the 2002 science-fiction movie “Minority Report,” in which Tom Cruise plays a Precrime officer who hunts down murder suspects before they can act, raises ethical questions.
“What they’re trying to do is forecast human behavior,” said Mark Williams, a former Federal Reserve bank examiner who’s now a lecturer at Boston University’s Questrom School of Business. “Policing intentions can be a slippery slope. Do people get a scarlet letter for something they have yet to do?”
Care will be taken to strike the right balance in monitoring employees at JPMorgan, said Dewar, a former U.K. regulator. She’s responsible for helping executives at the investment bank implement the new controls, while Chief Control Officer Shannon Warren has oversight of the firm-wide effort.
The bank wouldn’t describe all of the inputs being used for its predictive program, which specific business it’s being tested on, or what steps will be taken if concerns are raised about an employee.
A February memo from executives including Chief Operating Officer Matt Zames urged employees to flag compliance concerns to managers and reminded them that scandals hurt bonuses for everyone. Dedicated whistle-blower phone lines and e-mail addresses were created for workers to raise issues anonymously.
“The problem we saw last year in FX and the other unacceptable events have implications beyond just a one-time fine,” according to the memo, a copy of which was obtained by Bloomberg News. “They damage our reputation.”
New technology is half of a two-pronged effort to reduce legal bills. The other part involves a review of the firm’s culture -- reaching into every business and appointing more than 300 leaders in the investment bank -- to fix areas where lapses could occur, Dewar said. Training sessions use real JPMorgan incidents as examples so the lessons hit home, she said.
The program was hinted at in a report published in December on the bank’s website, “How We Do Business,” signed by CEO Jamie Dimon. It outlines ways the firm is improving compliance, including starting a global communications surveillance program.
“We recognized that enhancing market conduct would require using multiple preventive and detective levers in a coordinated way,” JPMorgan said in the report.
Meeting the company’s financial targets depends on reducing legal bills. The investment bank’s return on equity will rise to 13 percent from last year’s 10 percent largely by cutting legal and other expenses, according to a February presentation.
Thousands of investment bank and asset-management employees will be subject to the new predictive monitoring, said Dewar, who spent about a decade at the U.K.’s Financial Services Authority before joining JPMorgan in London in 2011.
The combination of new surveillance methods and an improved culture should lower the bank’s future legal bills, Williams said. Still, even Dewar acknowledges that the human element involves risks that can’t be eliminated.
“We’ll have a much greater confidence level about early detection,” she said. “I don’t think you could ever say it will be 100 percent.”