An important notion that has been debated in financial literature is market heterogeneity. Traditional financial models adopt the popular assumption that markets are efficient and that participants act rationally such that their actions are homogeneous. Nevertheless, studies in behavioral finance provide significant evidence of patterns and biases which render the assumption of homogeneity too simplistic and idealistic. Heterogeneity in financial markets can be defined as significant diversity in expectations of asset prices.


Many academics have argued that homogeneity is a very strong assumption, which does not hold, especially in the presence of speculative markets. This is because individuals exhibit different performance outcomes, and in many cases irrational behavior depending on the state of the market. Moreover, individuals may interpret the same piece of information differently due to their personal biases, thus leading to different conclusions about financial markets. As such, there has been a growing branch of literature, which advocates that financial markets are in fact heterogeneous and that one should take into account this phenomenon when examining asset returns as well as the performance of investors.

Trading Skills and Exogenous Factors

I investigate whether traders possess genuine trading skills, and how market volatility affects their decisions. Using a large dataset of retail FX traders on the EUR/USD market I find significant evidence of heterogeneity in performance and expectations, which persists throughout their trading career.

I show that while around 68% of traders have the ability to correctly predict future price changes more than half of the time, only around 22.8% have the ability to generate overall positive returns. In addition, around 27% of traders have the ability to favorably adjust their position size based on the magnitude of the change in market prices.

Moreover, I find that volatility has a detrimental impact on performance. However, as individuals learn to understand it they adjust for it in their trading decisions.

The Effect of Behavioural Biases on Performance and Skill

Finally, I investigate how five common behavioral biases affect traders’ performance. I find that skilled traders are herd initiators such that they are closely watched and mimicked by others. Skilled traders exhibit the disposition effect, whereby they are more likely to realize small gains and hold on to large losses. In addition, skilled traders are sensation seekers, meaning that they tend to use leverage to exploit price changes; however, they tend to avoid extreme levels of leverage which can be detrimental to their performance. Skilled traders are more likely to be inconsistent in the amount of leverage and margin they use, which is explained by their ability to adjust their leverage ratio depending on the state of the market and their confidence in their trading decision.

These behavioral patterns can also be used from a broker’s perspective in order to distinguish and categorize clients into different behavioral groups in order to hedge against those who are likely to be top performers based on their behavioral characteristics.

Read the full article and references:

Information about Demetrios Zamboglou

Demetrios is a multi-award winning executive and academic financial market specialist, holding a Fellow Charter Membership from the Chartered Institute of Securities and Investments (CISI) and he is the recipient of the European Commission (2017), Microsoft Research Grant (2016), the Amazon Web Services Award (2014) and the 30 under 30 prize by Square Mile Magazine in 2011. Dr Zamboglou obtained his MEng in Computer Systems Engineering with concentration in Formula Engines from Lancaster University, and his MSc from CASS Business School, where he specialised in IPOs and financial markets. Dr Zamboglou holds a PhD from King’s College London in Behavioural Finance. Demetrios Zamboglou is the Chief Business Developer Officer of Lykke AG, a financial technology company, responsible for the Firm’s International Business. Dr. Zamboglou joined the Firm in November 2016 from FXTM, where he led the firm’s UK operations. Prior to that, he held progressively senior roles as a corporate executive, risk manager, and quantitative analyst. Before Lykke, Dr. Zamboglou held Executive leadership roles at FXTM, zebrafx and FOREX CLUB specialising in issues including business development, strategy, risk management, market-making, and compliance.

We have all heard the expression “cut your losses” whenever it has become evident that we are wasting valuable time and resources on something that is deemed as failing. As logical as this advice may be, not everyone abides by it especially when it comes to financial decision making.

In finance, this phenomenon is known as the disposition effect and represents a trader’s tendency to realize gains quickly while holding on to losses. Academics have identified several factors that contribute to this behavioral bias including mental accounting, loss-aversion, regret-aversion, and mean-reversion in asset prices.

The disposition effect has been associated with poor financial performance. Nevertheless, several researchers have argued that traders can learn from their past trading activities to reduce the disposition effect. This means that, as traders become more aware of the impact of the disposition effect on their performance, they are more likely to avoid realizing gains too early and holding on to losses for too long.

What happens when traders find themselves in an environment where their actions are constantly on display, and where poor performance can instantly tarnish their trading reputation? Under such a setting, traders may exhibit a heightened sense of self-consciousness such that they become more aware of the consequences associated with displaying poor performance. Therefore, they would adapt their behavior to avoid displaying poor outcomes by limiting losses instead of holding on to them, and seek to realize larger gains in order to showcase their superior trading skills. Consequently, an environment that rewards good performance yet promotes constant scrutiny is expected to erode the disposition effect.

To investigate this, Roland Gemayel and Alex Preda compare the disposition effect of traders on a traditional trading platform to that of traders on a social trading platform (or STP).

Social Trading Platforms and the Scopic Regime

An STP is a novel concept that embeds online trading within a social media platform, creating a highly transparent marketplace where all information is public. This high level of transparency puts individuals under constant reciprocal scrutiny, which is an environment known as a scopic regime. This environment differs from traditional trading settings where trading records are held privately by the broker or the exchange.

Participants on an STP can be classified into two groups: trade leaders and copiers. Trade leaders are those who aspire to become money managers by publicizing their reputation and managing the capital allocated to them by copiers in return for monetary rewards. Copiers can choose to copy a single trade or all future trades of a trade leader, and do not need to intervene except to end the copying relationship. In addition, copiers can diversify their capital across several trade leaders with different trading styles to avoid having excessive exposure to a single style.

The Disposition Effect under Different Trading Settings

Roland and Alex find ample evidence of a weaker disposition effect for traders on the STP (i.e. under a scopic environment) compared to traders in a traditional trading setting. This supports the notion that the scopic regime, through its state of constant reciprocal scrutiny, erodes the disposition effect. This happens as traders become more self-conscious about their actions and aware of the consequences associated with poor performance on their reputation. As a result, they choose to realize and limit losses in order to avoid holding unjustifiable paper losses, while seeking to realize larger gains as a mechanism to signal their superior trading ability to potential copiers.

A Behavioral Risk Adjustment

One principal implication of the authors’ study is that when individuals are under constant observation, they tend to alter their behavior from loss-averse to risk-averse. This occurs as traders choose to limit their exposure to losing investments, which reduces the risk associated with holding on to large losing investments.

This relationship can be valuable to retail brokers and regulators, whose aim is to help traders adopt more effective risk management techniques. By incorporating social trading features into traditional online platforms, brokers would be enabling a scopic mechanism that is fueled by the collective scrutiny of all participants and that yields a risk-adjustment behavior at the individual trader level.

Click here for full article.

About Roland Gemayel

Roland Gemayel holds numerous degrees, including a PhD in Finance from Kings College in London, as well as a Master of Science with distinction from Cass Business School. Prior to joining Lykke, Roland was the Chief Dealer at Maximus FX and is also the founder of eSocialTrader – a financial resource on the topic of social trading, where Roland publishes opinions, experience, and research findings on the growing phenomenon of social trading. His work is published in top academic finance journals. Roland is a senior finance professional with over seven years of international experience in risk management, market making, financial modeling, consulting, product development, business operations, and strategy. His current work at Lykke as the chief dealer involves developing market making algorithms and building performance metrics and risk systems to ensure steady growth of trading operations.

This content was originally published in the Traction Fintech blog. It is republished in full with permission from the author.

The number of different types of regulatory reporting for financial instruments increased with the introduction of MiFID II on 3 January 2018.

The regimes have varying reporting requirements and affect entities in different ways. Which ones apply to you?

1. MIFIR Transaction Reporting

MiFIR transaction reporting requires the details of qualifying transactions to be reported to a National Competent Authority (“NCA”) or Approved Reporting Mechanism (“ARM”) within one day (T+1) of the transaction. It applies to transactions in financial instruments that are:

Transaction reports are required to include the identity of both the client and the trader or algorithm responsible for the investment decision and/or execution. Keep an eye out for a separate article which we will release shortly, explaining the requirements for executing agents.

Who has to report?

Investment Firms as defined in Article 4(1)(1) of MiFID II  and EEA branches of third country Investment Firms.

2. MiFID Commodity Position Reporting

Commodity derivatives listed on EEA trading venues (a Regulated Market (“RM”), Multilateral Trading Facility (“MTF”) or Organised Trading Facility (“OTF”)) and OTC derivative contracts that are deemed to be ‘economically equivalent’ to the venue listed instruments.

Who has to report?

MiFID Investment Firms and EEA branches of third country Investment Firms who trade the relevant commodity derivatives. 

3. EMIR Reporting

EMIR includes an obligation to report details of all derivatives to trade repositories.

Who has to report?

All counterparties to derivative transactions including both financial and non-financial counterparties but not natural persons.

4. MIFIR Trade Publication

Also referred to as ‘trade reporting’, trade publication relates to the near real-time public dissemination of trade data through an Approved Publication Arrangement (“APA”) required for transactions in in EEA venue-listed instruments. These reports don’t require as much information as a transaction report – the focus is on execution data relating to volume and price – and only one report is required for the trade rather than by all firms involved in the transaction as with transaction reporting.

Who has to report?

Either the trading venue or where a venue isn’t involved then the publication requirement falls to the Systematic Internaliser (“SI”). SIs are investment firms which on an organised, frequent, systematic and substantial basis, deal on their own account when executing client orders outside a regulated market (“RM”), multilateral trading facility (“MTF”) or organised trading facility (“OTF”) (together, “Trading Venues”) without operating a multilateral system.

If no SI is involved in the transaction then the obligation falls upon an Investment Firm.

5. MiFIR Reference Data Reporting

MiFIR requires the submission of instrument reference data from certain firms. This will enable regulators to compile a list (ESMA’s Financial Instrument Reference Data System or ‘FIRDS’) of instruments that are traded on venue or by a SI.  Keep an eye out for our upcoming article with further information on SIs.

Who has to report?

The reporting of reference data is an obligation that falls upon firms operating trading venues and firms acting as a SI.

Quinn Perrott

Quinn has an extensive background in IT starting as the IT Manager for City Index. Quinn then went on to be co-founder and General Manager of AxiTrader, one of Australia’s largest Margin FX providers.

TRAction Fintech can help you to understand and streamline your reporting obligations under and can simplify compliance by reporting on your behalf. Please contact us for further information.

A recent issue with the UK registered broker highlights the way client money protections work in the United Kingdom when it comes to Forex traders. As a result of investigations, the FSCS will be unable to compensate for any shortfalls in customers’ money held by Premier FX Limited.

There has been a piece of very rough news for customers of a UK registered broker, Premier FX Limited, as the Financial Services Compensation Scheme (FSCS) has just announced it will not protect money held with the company.

Premier FX Limited was only ever permitted to carry out certain payment services known as ‘money remittance’. However, Premier FX was found to be acting outside of the boundary of these permissions by also holding customer money in their accounts.

FSCS will not protect money customers held with Premier FX Limited because the firm was not authorised by the FCA to hold customer money in its accounts. This means FSCS will be unable to compensate for any shortfalls in customers’ money held by Premier FX Limited.

Premier FX Limited offered money transfer services to customers living and working abroad. Most of the firm’s business targeted expats living in Portugal and Spain.

On August 13, 2018 Premier FX Limited went into administration. The Financial Conduct Authority (FCA) appointed PKF Geoffrey Martin & Co as the administrator.

The FSCS advises Premier FX customer who have any queries to contact the Administrators PKF Geoffrey Martin & Co on 020 7495 1100, or email [email protected].

The website of Premier currently displays a message from Dina Devalia and Peter Hart of PFK Geoffrey Martin & Co., who have been appointed joint administrators of Premier.

Customers who have previously sent funds into Premier’s bank account(s) are advised to provide the information listed below, by either email or post. This will enable the Joint Administrators to address any queries and/or concerns the customers may have:

The Joint Administrators says they are currently carrying out their statutory investigations into the business and the above information will assist them with any queries Premier’s customers may have.

This content was originally published by FinanceFeeds.

In behavioral finance, herding occurs when traders make the same decisions either by intentionally imitating others, or unintentionally as a result of acting on common information. In recent years, the notion of herding has been capitalized on by brokerage firms and incorporated into online trading, creating a novel trading environment known as social trading.

What is Social Trading?

Social trading combines the conventional online trading model with the features offered by social media platforms. The result is a highly transparent marketplace called a social trading platform (STP), where participants can communicate, collaborate on strategies, and even explicitly copy each other’s trades in real-time using a mirror trading algorithm.

STPs require complete disclosure and free flow of information from participants regarding their profiles as well as their trading activities. This means that whenever a person executes a trade, it instantly becomes public on their personal profile. Rational people would only be willing to disclose information if they were getting something in return. Accordingly, STPs have incentivized information sharing through compensation schemes by allowing traders to become money managers where they can earn monetary rewards when others copy their trades. This essentially categorizes participants into two main groups: trade leaders and copiers.

Trade leaders aim to build a superior track record by executing original trades in order to attract potential copiers, who in turn allocate their funds to a single trade or all future trades of a certain trade leader through a simple click of a button.

The high level of transparency on STPs puts individuals under a spotlight of constant reciprocal scrutiny. This state is known as a scopic regime, and is meant to characterize the organization of an activity, such as trading, where participants observe each other’s activities in real time. This distinguishes STPs from conventional financial settings and institutions, such as mutual funds and hedge funds, where information on holdings and performance is only disclosed periodically by the former and voluntarily by the latter.

Value in Order Flow Data

The collection of all trading records on a platform is known as the order flow. This aggregated data can be particularly valuable to traders in the foreign exchange market. Studies have shown that it can be used to forecast exchange rates. The importance of order flow information is further accentuated by the fact that there are infrequent announcements of fundamental data by governments and central banks.

Given the fast-paced world of electronic trading, the limited capacity of individuals to analyze thousands of investment opportunities, the ease of access to detailed order flow data, and the aspiration to jump-start a career as a money manager and earn performance compensation, trade leaders on STPs may be highly tempted to avoid conducting their own analyses, and simply imitate their peers.

Consequently, one can argue that the competition to attract copiers in the scopic environment would augment the limitations and personal biases of trade leaders, thus producing excess and perpetual localized herding behavior as traders continuously rely on public order flow as a steady source of information.

Nevertheless, the efficient market hypothesis postulates that given an environment with high information transparency, prices should reflect all publicly disclosed information. Hence, despite the fact that STPs facilitate imitation, herding behavior should erode, as the information contained in public order flow data would already be incorporated into security prices. Moreover, retail traders in the foreign exchange market are not likely to possess private fundamental information. Hence, rational trade leaders would realize this and avoid herding.

Given the lack of research on this novel phenomenon, Roland Gemayel and Alex Preda investigated whether the scopic regime on STPs induces higher localized levels of and persistence in herding compared to those found in traditional trading environments.

Evidence on Herding under a Scopic Regime

In general, Roland and Alex find that the overall level of herding under the scopic regime is significantly higher compared to those found in other traditional trading environments. Furthermore, they examine herding for different samples of traders based on trading intensity, leverage, and trade size and find that:

These findings emphasize that the excess and perpetual herding produced by the scopic regime is intentional and arises due to the limitations and biases of retail traders.

Implications of Herding

The high level of and persistence in herding behavior among trade leaders on STPs unveils several implications.

From a macroeconomic perspective, intentional herding can increase volatility and destabilize markets due to the high correlation among trades. This issue may quickly materialize as STPs increase in popularity.

Second, regarding copiers who diversify their investments across multiple trade leaders, the benefits of diversification are significantly diminished in the presence of herding. This is because trade leaders who herd are effectively trading the same securities in the same direction and at the same time. Thus, copiers should take this into account when selecting the trade leaders they wish to allocate their funds to.

Read the full article and references:

Roland Gemayel, PhD

Roland Gemayel is Chief Dealer at Lykke and holds numerous degrees, including a PhD in Finance from Kings College London, He is a member of the Financial Commission’s Dispute Resolution Commitee and a contributor to our Expert Opinion column.