Female traders could reduce market crashes

Researchers at the University of Leicester have shown that increasing the proportion of female traders makes the market more volatile, but at the same time can reduce the occurrence of the most extreme crashes. The research also showed that male traders on average earn less than their female counterparts but, as they were more comfortable taking bigger risks, the best performing individual overall was likely to be male. Hormone levels in traders have been shown to be affected by whether a trade is profitable or not and men are more sensitive to this effect than women. Dr Daniel Ladley, senior lecturer in finance, said that changing the gender balance of traders might require “a movement from large bonuses for the best performers to a system that better rewards consistent profits."

It’s official. Women are better at trading than men.

At least that’s the finding of new research undertaken by academics at the UK’s University of Leicester.

To be more specific, employing a greater number of female traders reduces the chances of a market crash and increases the regularity of positive trading returns, according to the study.

Despite the findings, the majority of trading desks continue to be dominated by male traders.

A study conducted by JM Coates in 2012 found that trading desks are 95% male and 5% female on average, following a survey of operations in the UK and the US.

Investment 2020 is an organisation founded by Henderson Global Investors’ chief executive officer Andrew Formica and JO Hambro’s former chief executive Nichola Pease. It aims to encourage recruitment from a wider talent pool in asset management.

Karis Stander is the managing director at the organisation. She says, while the figures may not make for impressive reading, there is strong evidence that the City of London – particularly asset managers – are keen to have a better balance.

She explains: “Attracting more women into the industry – not just in support functions, but in front office too – will partly address some of those issues.

“It is frustrating when you see discrepancies, but I am not a believer in going down the quota route.”

Stander says Investment 2020 has the support of the largest fund managers in the world and boasts active involvement with representatives from Legal & General, Standard Life Investments and Henderson Global Investors.

However, despite marketing the benefits of taking a role at an asset management business, women remain under-represented in both portfolio management and trading.

Poor incentives

In trading specifically, the remuneration and bonus schemes in operation are unlikely to favour women either.

According to the University of Leicester paper: “Even though male traders may underperform female traders and make profits less often, reward schemes in financial firms may still select towards large groups of male traders.”

In other words, while female traders may do better as a group, they are still paid less than their male colleagues overall.

Female traders do indeed outperform male traders on an averaged basis, but men are more likely to “hold their nerve” during market turbulence. Men are also the outliers for abysmal performances as a result.

So, if the truly exceptional and truly horrific performers are both men do the current financial remuneration structures in operation at most banks and asset managers reward this attitude to risk taking?

The report suggests that they do, despite regulatory attempts to change this culture.

“Financial bonus schemes typically reward the best performers and often lead to large numbers of other traders being fired, potentially even those making small profits.”

Recruiters may want to consider the impact of financial incentive schemes for two reasons.

One – they may increase the potential for a catastrophic loss and increase the appeal to chase losses and two – because they may also be unfairly geared towards men.

The report concludes that “in an environment of highly selective performance-based evaluation… one would expect the population to be increasingly biased towards male traders, even though on average, they underperform.

“As such the overly male culture of financial firms may itself be driven by hormones and reward systems.

“In order to increase the number of female traders it may be necessary to fundamentally change the bonus culture of investing.”

Allianz Global Investors is one buy-side firm, which had a female chief executive until March of this year.

Elizabeth Corley’s influence in the business is clear to see in its recruitment policy, which specifically encourages a gender diverse environment.

A spokesman for Allianz GI, said: “A key focus of our work around inclusion and diversity is ‘gender parity’ and we have an ambitious global programme aimed at improving female representation in senior roles.

“Gender equality is crucial for our future business success, so it is critical we encourage women to develop their careers, focussing on female progression at all career levels.”

Allianz also has a senior female leadership programme aimed at improving gender diversity and enhancing female career development.

The spokesman explained: “These include unconscious bias training, networks that offer support to female colleagues and, ensuring transparency of promotion and recruitment processes.

“The programme is part of wider efforts to improve overall organisational diversity and promote a more inclusive culture at Allianz GI, led by our local and global Inclusion & Diversity Councils.”

But not all buy-side staff are aware that their companies promote gender equality. When The TRADE contacted BlackRock – the world’s largest asset manager – its press team was unable to immediately outline any such programmes and did not respond to a subsequent request for further details.

Market crashes

But while a greater gender balance on a trading desk may reduce the likelihood of extreme events, it may increase smaller levels of volatility, the research shows.

Female traders have a tendency to listen and react to market signals more closely, the research found and this could have a much more significant impact on day-to-day asset price volatility if the trading population became more female.

The report suggests that arguing for a better gender balance to reduce global one-off catastrophes may be tricky because of the above.

It states: “Increasing the proportion of female traders will have mixed results – an increase in daily volatility [albeit with] a decreased frequency of extreme events.

“Regulators may face potential criticism as making this change may increase daily volatility [and] many observers use volatility as a proxy for risk.”

The report concludes that it may be difficult, therefore, for regulators to make a case for more women in trading because mainstream members of the press and commentators wrongly assume that volatility risk and catastrophe risk are the same thing.

Hormones

Hedge funds have long considered the impact of hormones and testosterone levels on their traders’ actions and the link between hormones and social behaviours extends back years.

Despite this, women working in the City of London have previously been the focus of sexist jokes, labelled as ‘hormonal’ or ‘over-emotional’, according to a recent article in The Daily Telegraph.

But this latest research paper shows that it is in fact MEN and not women who are most affected by hormones on the trading floor.

“Extreme volatility typically occurs when positive feedback traders correctly pick a trend and make a profit. The profit leads to higher hormone levels and greater risk taking,” the report states.

“As a result, the positive feedback traders are able to build and continue a bubble. The larger proportion of male traders exacerbates this effect resulting in larger bubbles….”

What next?

But while there is clear evidence that both sexes have certain characteristics in their trading when analysed as a group, recruiters may have a hard time justifying hiring or not hiring any individual based on this research alone.

The key is in encouraging more women into trading environments and allowing those who already work there in support roles to become traders in their own right, should they want to.

Organisations such as Barclays, Ignis Asset Management (now Standard Life), Invesco and Legal & General Investments have all done this successfully in the past.

Karis Stander concludes: “The message from firms is we want to work with them. There have been some great strives forward. The appetite is there at the top level to change the dynamic.

“It is about spreading the message. It is a fabulous industry. [When recruited]… it is not to define where a person is going to go, but to give them an insight about what the industry has to offer.”

“Even though male traders may underperform female traders and make profits less often, reward schemes in financial firms may still select towards large groups of male traders.”

“A key focus of our work around inclusion and diversity is ‘gender parity’ and we have an ambitious global programme aimed at improving female representation in senior roles.”

Allianz Global Investors