JPMorgan’s David Hudson: Meet Dimon’s disruptor-in-chief

Illustration: Andrew Archer

In 2002, one of the first multi-bank trading platforms in the foreign exchange market went bust. Despite being backed by FX powerhouses including Citi, Deutsche Bank and JPMorgan Chase, Atriax had run out of money and ceased trading after little more than two years, leaving the path wide open for rival FXall to capture the young multi-bank trading business.

For several months after its demise, it was David Hudson’s job to sell the platform’s equipment and assist in the shut-down of its London operations. For the young South African programmer, it was a sobering and eye-opening experience as successive vendors came into the building and were astonished at how a startup could have burnt through so much capital in such a short space of time.

Fifteen years on, Hudson has ascended the ranks of JPMorgan, where he is now responsible for testing new technologies and innovations in its huge markets business. With a multimillion dollar budget that many of his peers might reasonably envy, Hudson’s mandate is to bring a culture of innovation to the investment bank and ensure it remains relevant to its clients, never afraid to try out new ideas and invest money where needed.

JPMorgan looks in good shape in 2017. Profits are up in the corporate and investment bank (CIB) and it is widely seen to have got through the financial crisis and its regulatory aftermath in better shape than most of its rivals. Hudson, perhaps a little greyer than back in the Atriax days, is credited with offering a more positive vision for the future than has prevailed on many trading floors in recent times. 

We deliberately didn’t create a dedicated central innovation department… It makes the problem someone else’s and abdicates responsibility to a small group of people who are far less likely to solve problems for a large investment bank – David Hudson, JPMorgan

“Under David’s leadership, the markets business at JPMorgan has become obsessed with trying to disrupt its own business model,” says one former JPMorgan banker. “They constantly challenge themselves to protect their position, and it is remarkable how they have changed the philosophy of the bank with the tools they are building and the partnerships they are making.” 

Still only 42, Hudson’s career has already taken many twists through the crisis years and involved a few more declining businesses since the Atriax days. But reflecting on the journey from high up in JPMorgan’s Canary Wharf tower, the story still begins with Atriax. Although he worked on the platform for less than two years, its collapse continues to inform his thinking today.

“Atriax was a fascinating experience in trying to use new technologies, particularly in areas such as streaming rates and multi-dealer pricing,” he says. “But the expenditure and burn was too high, and I learnt that people tend to overestimate the impact of change in the short term and underestimate it in the long term.”

It is revealing, he adds, that FXall, which launched at the same time with an almost identical business model, flourished for many years, leading up to its acquisition by Thomson Reuters in 2012. The lesson for Hudson is that it takes time to effect change, which may help to explain his calm demeanour.

“New ventures are often launched with great fanfare, with the expectation of great things, but they often don’t materialize very quickly. Clearly, the FX world is now very different as a result of what both Atriax and FXall did, but neither made any money in the first few years.” 

New venture

Hudson’s appointment was a new venture in itself for JPMorgan. Formerly chief financial officer for global markets, he was promoted in May 2016 to the newly created role of global head of markets execution and asked to build on the success of the bank’s cross-asset execution services unit, which had itself only launched in 2014, as well as assessing emerging trends, technologies, electronic platforms and potential partnerships. 

Reporting directly to investment bank chief Daniel Pinto and with a seat on the CIB management committee, Hudson’s position is unique among investment banks in that he works above the individual business leaders and must challenge them to try new ideas and approaches rather than answering directly to them. Those business leaders also know he has the direct mandate of JPMorgan Chase chief executive Jamie Dimon. 

It stands at odds with other banks that have created dedicated teams to explore the potential uses for blockchain, for example, or testing labs where new technologies can be developed and trialled.

“Of course, we do still have centres of excellence and research labs looking into emerging technologies and the like so that we are efficient in research and development,” says Hudson. “But we deliberately didn’t create a dedicated central innovation department. That is probably the very worst thing a bank could ever do in this area. It makes the problem someone else’s and abdicates responsibility to a small group of people who are far less likely to solve problems for a large investment bank.”

The markets execution function totals several hundred staff globally, but as it is not an isolated department, the unit is scattered through business lines and trading teams, with reporting lines running through the business, not directly to Hudson. It is structured to work with the businesses while also stepping back and challenging the status quo. 

“What we have done is to create a message all the way from the top down that we have investment capacity and we have a willingness to try new ideas,” Hudson explains. “If they’re good ideas, we will spend on them. If our clients say they’d like to work differently with us then we embrace that change and try to make the model work.” 

It is an ambitious strategy at a time when many banks, particularly in Europe, are still limping through the post-crisis world, struggling to keep businesses afloat at a time of heightened capital requirements and heavy balance-sheet constraints, let alone invest in new technology. But history has taught JPMorgan that it cannot afford to stand still and must continue to invest for the long term.

“There is a lot of cyclicality in the firms that dominate the banking sector and the world changes because of things we can’t control, but the real question is: can we adapt and change at the same time? That can be very difficult for banks that don’t have scale and can’t always compete on price,” says Hudson. 

“Non-bank liquidity providers can use the latest technology at the cheapest possible price to compete with incumbents – but that is competition rather than disruption. Those that really suffer are the banks in the middle tier that are structurally expensive, don’t have scale and can’t be as nimble.”

Learning from mistakes

JPMorgan has been through its fair share of pain since the crisis, with the London Whale trading losses in the chief investment office in 2012 representing a low point that cost the bank more than $6 billion. But in seeking to learn from mistakes, Hudson looks back even further to a time before the crisis when it suffered a steady decline in the fortunes of its once-leading FX business as a result of institutional apathy and a failure to adapt to the rise of electronic trading.

In 2003, not long after the collapse of Atriax, Hudson joined JPMorgan as a business manager in its currencies and commodities business, when the bank was losing ground to rivals that were embracing electronic trading at a faster pace. As Deutsche Bank, Barclays and Citi invested in their platforms, JPMorgan’s FX franchise began to fester, teaching Hudson another valuable lesson. 

“JPMorgan suffered a steady decline in the competitiveness of its FX business in the early 2000s, and the painful memory of that remains in the DNA of many of the people that still work here. It takes a very short period of time to lose relevance to the market as a result of failing to embrace changes in technology, and it takes a very long time to win it back.”

The bank’s fortunes began to change after Troy Rohrbaugh joined in 2005, followed by Eddie Wen in 2006. Both played a role in bringing quants and technologists into the front office so that the business could take ownership of its system development rather than relying on a separate IT department. The bank would go on to achieve some big successes with its JPMorgan Markets trading platform and its Athena risk-management platform, becoming the first to introduce trading functionality from a mobile device.

“The strategy we took was to ask how we engage, differentiate and market ourselves so that we would be seen as a truly innovative bank that tries to do things differently,” says Hudson. “We have since built a good platform in JPMorgan Markets and we were first with mobile trading. We quickly realized it’s a powerful way to engage with clients by having accessibility through their personal device. Most of our clients say what is holding them back from making greater use of mobile devices is internal compliance policies, but they’re all working on it.”

Breaking the hegemony of Deutsche and Citi in FX has taken time, but as Deutsche’s fortunes have declined, falling from top FX bank in 2013 to fifth in 2017, according to Euromoney’s rankings, JPMorgan has risen. In the 2017 survey, it won a market share of 10.34%, putting it second behind Citi, up from sixth in 2014 and ninth in 2007. 

“A persistent investment approach over the long term to try and do what our clients want and a tailwind of other firms not investing meant that we managed to gain more traction in FX,” says Hudson. “But at the back of our mind is that problem that it’s very easy to lose all this. Memories can be short and, at a basic level, if all you’re competing on is price and a pretty front end, then any fintech could put together a platform and generate what seems like a similar experience in spot FX.”

Hudson played a part in the change in JPMorgan’s FX fortunes, but he also gained experience elsewhere before taking up the markets execution role last year. In 2007, he moved from currencies to a business management role in retail structured products at a time when that market was in the doldrums, then he took on fixed income exotics and hybrids at an equally challenging time. 

“As a COO, one is expected to be a generalist and to have learnt new things along the way across the firm, so, for example, I worked in retail structured products and later fixed income hybrids and exotics, but both businesses declined completely during the crisis. I was tired of closing down businesses and wanted to build new things, but first I took some time out, learnt to surf and travelled the world.”

Returning to JPMorgan in 2010 after a brief stint at Nomura, Hudson became head of business management for FX and rates and could see the impact that the new leadership was having on the business. 

Rohrbaugh, now head of macro trading and, externally, chair of the New York Fed’s FX Committee, has been a source of stability not just for JPMorgan but also for the broader FX industry during its most turbulent years. 

“I returned to JPMorgan to work for Troy, then head of FX, in 2010,” says Hudson, “and it was fascinating to rejoin the FX business and see how it had matured after five years. It was clearly much more aggressive and capable and there was a big focus on electronic distribution as well as on risk management. The bank didn’t compete significantly with the two major players at that time on single-dealer screens, so we had to win in the multi-dealer space, which was really all about pricing and risk management.” 

Similar questions were asked of the bank’s FX staff at that time as Hudson now asks of his own team on a broader cross-asset basis, such as how can a leading bank differentiate itself in what is ultimately a commoditized business?

The answers are not always clear-cut, but what propelled Hudson to his current role might just be the willingness to try out new ideas and innovations that could benefit clients, even if success is not always guaranteed. That is a huge cultural distinction that often separates large global banks from nimbler startups that are generally less afraid of experimentation and failure.

“Behaviours and habits are changing over time, and the concept of only working when you’re at the desk has totally vanished,” says Hudson. “Once you have the basics of risk capabilities, balance sheet and everything else, the thing that will swing the needle most is how you engage with clients and adapt to changing business models.”

Breaking new ground

After 18 months in the markets execution role, how far has the needle swung? Under Hudson’s leadership, a number of new initiatives have been pursued. From a plan to open up the flagship Athena risk system to clients next year to new systems that mine customer data to give sales teams much deeper and more immediate insight into their clients’ activities and trading histories, the markets execution business has certainly proven its appetite to break new ground.

In one early move, leading market-maker Virtu Financial said in August 2016 that it would provide JPMorgan with trading and order routing technology to access the dealer-to-dealer market in US treasuries for an initial term of three years. Tapping a non-bank liquidity provider’s systems is a bold move for a leading Wall Street bank and reflects Hudson’s recognition that banks do not always have the best technology.

“The partnership with Virtu was all about us being a little humble and recognizing that there is no reason why we have to do everything ourselves,” he says. “We realize that some specialist firms may be better or quicker in their use of certain technologies and we accept that, in those cases, it’s better to partner with them. Working with Virtu helped us to consider how far up the technology stack that the machines and some of the software capabilities had become commoditized and understand where outsourcing should start and finish.”

Pace of change

But given Hudson’s belief that the pace of change is overestimated in the short term and underestimated in the long term, it is still early days. One of his initial goals was to undertake detailed and wide-ranging consultation with clients of the markets business across asset classes to work out what they really want and what progress they would like to see.

Attention to client needs might sound like an age-old cliché in the banking sector, but it is the cornerstone of how Hudson believes JPMorgan can remain relevant for the long term. While non-bank market makers such as Virtu and innovative financial technology companies may be snapping at the heels of many banks, he does not believe that being a large bank subject to multiple regulations should preclude it from being innovative.

“I have been somewhat obsessed with Amazon this year,” he says. “In many respects, it is bigger than JPMorgan – more people, more countries, bigger market capitalization, greater revenue and they probably move more things every day than we do trades. Yet I suspect that Amazon would probably be seen as a more innovative company, so it can’t be that big companies can’t be innovative, although it may be that most big companies aren’t innovative.”

What sets Amazon apart, he believes, is its determined focus on the client. “Amazon follows the customer journey relentlessly, and I have closely studied why banks don’t do that, even if they think they do. Regulation is part of it, but it’s too easy to hide behind that. So we went out and spoke to our customers about what is troubling them and how we as a financial services firm can help.”

The conversations with clients have been naturally varied, but one stands out. As the markets execution function was being established last year, Hudson spoke with a large European fund manager on the sidelines of an industry conference in Barcelona. 

“What he told us became something of a guiding principle of how we needed to work. He said: ‘You know we do a transaction, but you don’t know what my day is really like, how I would like to get better at my job and how you could help me get better at it, so it would behove you to spend a lot more time understanding how we work.’ Put simply – ‘Stop thinking about what you’re trying to sell, and more about what it’s like to be me.’”  

As with any company, our ability to deliver is our biggest constraint. We are coming up with fresh ideas, but some of these things take time and that creates frustration – David Hudson

That warning helps steer Hudson in his new role, looking to understand clients’ needs and to make decisions based on what adds most value for them. He is the first to admit that not every idea works, but a willingness to try them is arguably more important. An effort to help market participants navigate multiple swap execution facilities (SEFs) under the Dodd-Frank Act is one such.

“We have already tried some things that haven’t worked out, such as our SEF aggregator that shows the best price across all SEFs and allows clients to execute on the best. We thought it was a good idea but it didn’t really take off. Clients picked the SEFs they liked and stuck with them,” says Hudson.

The implementation of the Markets in Financial Instruments Directive (Mifid II) in Europe next year will bring further opportunities to deliver technology that helps firms improve their workflows, as well as complying with the new requirements.

“We want to use the opportunity of being slightly ahead – we have a few percentage points of return on equity clear on our next competitors – to invest in technology. So instead of just building the basics to comply with Mifid II reporting, for example, we can use this as an opportunity to rebuild workflow. That means pulling together 15 disparate apps and contextually linking them so that, for example, when the phone rings, it pre-populates the screen with the trade ticket and trading recommendations relevant for the person on the phone.”

In January, JPMorgan became the first bank to integrate FX transaction cost analysis from technology start-up BestX – a step that gives clients a valuable independent assessment of the quality of the bank’s execution algorithms, raising transparency and enabling firms to meet Mifid II best-execution requirements for their FX trades. 

It is a big step for a bank, of course, because it gives clients the evidence they may need to pick another counterparty if the execution algos prove not to be best-in-class.

“We’ve always had good execution algos, but what we were missing was education, a higher level of transparency, control and user experience,” says Hudson. “We will allow people to launch their algos from whichever platform they use on their desks and will provide all of the necessary pre- and post-trade transparency and control from that point. 

“We were among the first banks to partner with BestX because our clients needed to prove to their clients and management why choosing JPMorgan’s algos is a good idea, and we were certain that transparency would demonstrate the quality of our product. In general, our clients have repeatedly told us that integrating to their workflow is most important to them, not forcing them to work the way we want them to.”

Jewel in bank’s crown

Further innovation should be on the horizon as Hudson and his team continue to invest and seek out the best technology still in development – both within and outside the bank. JPMorgan’s in-residence programme represents another jewel in the bank’s crown, inviting promising fintechs to work within the bank for stints of up to 12 months and benefit from its scale, data and technology. The goal is to get these small companies to the stage where they can deploy their product on a broader scale, with JPMorgan potentially as the first customer.

This year 400 companies applied to the programme; the bank has picked just six, including Droit Financial Technologies, H4 and Mosaic Smart Data. Launched last year, the in-residence programme is managed by Oli Harris, with input from Hudson, as well as investment bank chief administrative officer Sanoke Viswanathan and head of strategy Max Neukirchen. It furthers Hudson’s ambition to lead the way in the pursuit of innovations and industry collaboration.

Will JPMorgan one day be viewed with the same reverence in which Hudson sees Amazon? If he achieves his objectives, then it will.

“Daniel Pinto wanted to create a structure where we can invest for the long term in ideas that may or may not pay off but if we don’t do them, we know we will miss out on something important,” says Hudson. “We are fortunate enough to be in the position that $50 million here or there isn’t a business-changing amount of money to spend on the optionality it creates. There used to be a huge bias that existed in most banks not to do something if it wasn’t certain to pay off, but we are gradually changing that.”

Hudson declines to give further detail on his budget, other than to say that the bank is in the fortunate position where its capacity to deliver, rather than its budget, is the greatest constraint in delivering what it wants to achieve for its staff and clients.

“As with any company, our ability to deliver is our biggest constraint,” he concludes. “We are coming up with fresh ideas, but some of these things take time and that creates frustration. We are of course a regulated business, so we rightly have strict parameters in which we need to work, but culturally there is a real change going on and the incentives and structures are in place for people to be rewarded for being innovative.”