Tuesday, January 29, 2008

Traders : Risks, Decisions, and Management in Financial Markets

Choice quote from Traders : Risks, Decisions, and Management in Financial Markets by Mark Fenton-O’Creevy, Nigel Nicholson, Emma Soane, Paul Willman:

Trader management is a training free zone. In a combined 70 years of experience, the authors have never encountered so little management development in sophisticated organizations of vast resource.
In the current emphasis on the establishment of effective systems for the management of operational risk we think that there is scope for regulators to require some form of accreditation on the part of those responsible for traders, to ensure that they at least understand the existence andb behavioral implications of heuristics and biases.

The industry relies on large variable pay elements which do not effectively align principals’ interests with those of agents. They do not particularly benefit firms either but there are strong first-mover disadvantages to any firms that move away from a practice so lucrative for traders. Regulators should require firms to turn a proportion of trader bonus payments into deferred income, reclaimable on retirement from trading but retained against the possibility of malfeasance by traders.

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