انضباط تجاری حرفه ای و منش تجاری

Recent evidence indicates irrational behavior among retail investors. They hold onto losses and sell winners in a manner consistent with the disposition effect. Market professionals often use the term “discipline” to indicate trading strategies that minimize potential behavioral influences. We investigate the nature of trading discipline and whether professional traders are able to avoid the costly irrational behaviors found in retail populations. The full-time traders in our sample hold onto losses significantly longer than gains, but we find no evidence of costs associated with this behavior. The successful floor futures traders in our sample exhibit trading behavior characterized as rational and disciplined. Moreover, measures of relative trading discipline have predictive power for subsequent trading success.

The behavioral finance literature suggests that certain market anomalies are consistent with the presence of irrational trading by investors (e.g., Bernartzi and Thaler, 1995).1 Recent evidence, for example, Odean (1998a) and Grinblatt and Keloharju (2000), suggests that various populations of traders exhibit irrational behavior. Odean (1998a) finds that winning stocks sold by a sample of retail traders subsequently outperform the losers that they continue to hold, evidence he attributes to the disposition effect.2Grinblatt and Keloharju (2000) find that Finnish retail investors are reluctant to realize losses, after controlling for trading style (which Odean does not) and many other factors. They also find significant differences in trading styles between Finnish retail investors and foreign institutions, as does Grinblatt and Keloharju (2001), suggesting that professionals could differ from retail customers. However, little evidence has been offered as to whether the disposition effect influences the decisions of professional traders.3 Is it surprising that small retail investors have eccentric and potentially costly trading patterns? Evidence of irrationality, including the disposition effect or overconfidence (e.g., Odean, 1998b), is certainly consistent with conventional wisdom and anecdotal evidence. Generic trading advice literature typically warns against the type of trading patterns described by the disposition effect and proposes instead disciplined approaches, through which investors are advised to use predetermined trade exit points (times or prices) to mitigate any potential behavioral costs from irrational mental accounting or overconfidence. (Dozens of trading advice books have been published, many during the day trading boom of the latter 1990s.) The conventional wisdom among professional traders is that disciplined trading, or the avoidance of behavioral biases, is the key to success, as the following quotations illustrate. To be a successful trader, I must love to lose money and hate to make money. The first loss is the best loss; there is no better loss than the first loss. Trading is a discipline. From “EEK” (memoirs of Chicago Board of Trade member Everett Klipp, 1995 (EEK represents his trading floor badge ID)) One of the critical criteria I use in judging my traders is their ability to take a loss. If they can’t take a loss, they can’t trade. John Mack, Morgan Stanley chief executive officer (CEO), in a 1991 deposition. If you have bad inventory, mark it down and sell it quickly. Attributed to Bear Stearns chairman Alan “Ace” Greenburg, describing his penchant for quickly selling losing trades, in the Wall Street Journal (“If Wall Street were Olympian, He’d Ace the Marathon,” March 8, 1999) So, as our discipline requires, we sold. J. Stowers, CEO, American Century Funds, in a December 10, 1999 letter to investors Never meet a margin call. (In other words, if the market is going against you, concede defeat quickly and liquidate before you really lose your shirt.) James Grant, editor, Grant's Interest Rate Observer, quoted in BusinessWeek (“Failed Wizards of Wall Street,” September 21, 1998) If professional traders’ discipline minimizes behavioral costs, then models of trader irrationality describe only small numbers of investors or lightly capitalized investors whose behavior has little impact on price formation. In particular, the irrational practice of treating stocks differently depending on their history (e.g., gains versus losses) could be an annoying but essentially harmless anomaly, with the cure (yet again) being buy and hold, particularly in the absence of momentum. Evidence that professional traders are undisciplined or exhibit costly irrationality would heighten support for behavioral approaches to asset pricing and also to other areas.4 Using high-frequency transactions data, we study the trading behavior of professional futures traders on the Chicago Mercantile Exchange (CME), where trades are typically offset in a matter of minutes. These traders depend on the profitability of their trading to meet the direct (exchange seat lease) and indirect (opportunity) costs of trading in the pit. We examine approximately 300 traders active in four CME commodities during 1995. Much of the analysis is based on the first six months of 1995, with the second six months held for out-of-sample testing. We investigate the relation between discipline and future success using two measures of trading discipline that are consistent with indicators of futures trading success described in Silber (1984). The first is trading speed, or how quickly trades are offset. This fits with our interpretation of trader discipline as the outcome of rational decisions to exit trades once informational advantages dissipate, using the metric of time instead of price change as the predetermined constraint. In the context of high-frequency trading environments such as the futures pits, orderflow-related informational advantages, which are described as semi-fundamental information by Ito et al. (1998), are likely to be short-lived and should result in relatively quick trade exists if disciplined traders use a time metric. The second measure of discipline is exposure, determined by the magnitude of paper losses per contract on trades held for a long time. Disciplined traders presumably resist holding onto large potential losses that they hope will turn around. Whether discipline is defined as adhering either to preset exit prices or to predetermined offset intervals, disciplined traders will be less likely to sit on large paper losses. We then examine the relation between these discipline measures and subsequent trader success in out-of-sample data. We find that the two discipline measures are positively related to subsequent success. Traders who offset trades quickly are more successful in the future.5 In addition, traders who are more prone to hold onto large paper losses are less likely to be successful in the future. This second result could indicate that less successful traders are subject to the disposition effect and hold large losses beyond the rational exit time, impairing their chances of success. However, we find that the speed at which traders offset winning trades is just as helpful in predicting success as the speed at which they close losses.6 Therefore, while a lack of time-based discipline is costly (in terms of a lower probability of future success), this cost does not appear to be associated with the disposition effect. We offer alternative explanations for the relation between excessive retention of large losses and a subsequent lack of success. Consider trades entered on the basis of some Bayesian prior, with new information continually entering into the decision to close the trade and thereby realize a gain or loss. If we characterize as overconfident a trader who places too much weight on the prior (a common definition), then overconfident traders could be most likely to retain losing trades, ignoring negative new information for too long. If our discipline measures are related to overconfidence, then our finding that less disciplined traders are subsequently less successful is consistent with Odean (1998b), as well as Daniel et al. (2001), who find that overconfident traders take excessive risk and underperform rational traders.7 The discipline/success results suggest that trading speed is an important factor in profitability. Our data also allow us to investigate the offset speed of winners versus losers using methodology similar to Odean (1998a). We first examine the entire population of traders and find that traders consistently hold losing trades for significantly longer periods of time than winning trades. However, we fail to find costs associated with this behavior, in direct contrast to Odean (1998a). Nor do we find a contemporaneous relation (within the first six-month period) between trader success and the tendency to hold losers longer. Our inability to find costs associated with the tendency to hold losers longer than winners contrasts with evidence of costly behavior provided by Coval and Shumway (2005). Coval and Shumway find that traders with midday losses subsequently exhibit increased risk taking and poorly executed trades, results they attribute to prospect theory, and that the losing positions are held longer than gains, a result they interpret as consistent with loss aversion. Differences between our findings and those of Coval and Shumway are possibly the result of different datasets (their data are for the Chicago Board of Trade in 1998) but more likely are driven by important methodological differences, particularly regarding the time frame and trade aggregation. Similar to Odean (1998a), we examine behavior on a trade-by-trade basis, with our trades occurring over time horizons measured in minutes. Coval and Shumway (2005) define gains and losses via temporal aggregation, not on a trade-by-trade basis, examining the role of cumulative morning gains or losses on afternoon trading, an approach also taken by Locke and Mann (2003). Despite substantial differences in methodology (and exchanges), both of those papers provide evidence that morning losses lead to greater risk taking in the afternoon.8 For the Coval and Shumway evidence to be consistent with loss aversion, trader behavior must depend on the mental accounting of gains and losses in a cumulative sense, instead of on a trade-by-trade basis. If so, then the trade-level results that we observe, i.e., no apparent costs of holding losses longer than gains, could be subsumed as gains or losses accumulate. Our failure to find any immediate costs associated with otherwise apparent loss aversion (holding losses longer than gains) led us to examine the sensitivity of the apparent loss aversion to the choice of benchmark. We identify other reasonable benchmarks for gains and losses, somewhat akin to using a market model to identify excess returns. While the zero benchmark is intuitive and clear, it is also reasonable to assume that professional traders focus on net gains or losses. When we benchmark gains and losses on the basis of an expected profit, we find little evidence that traders hold net losers longer. The paper's remaining structure is as follows. Section 2 describes the futures trading data and general methodology. In Section 3 we present the results, and Section 4 concludes.

We examine the discipline of professional traders and their tendency to exhibit the disposition effect. By discipline we mean the adherence to trade exit strategies, which we measure by either the general speed of trading or by the avoidance of riding losses: holding onto positions with large loss exposure (negative mark-to-markets). We measure the tendency to hold onto large losses for each trader as the median of the trader’s maximum potential (mark-to-market) loss per contract for trades held over ten minutes. In either case, trades will be offset more rapidly by disciplined traders, as suggested by Silber (1984). We find that measures of relative discipline based on trading in the first six months of 1995 are related to trader success in the subsequent six months. Traders offsetting losses more quickly are more likely to be successful in the future, but speed in closing gains is equally useful as a success predictor. Thus, aversion to realizing losses is not driving the results. However, we also find that traders who hold onto relatively large losing trades for longer periods (more than ten minutes) are subsequently less likely to be successful. Using the natural zero benchmark for establishing gains and losses, we find that professional futures floor traders exhibit asymmetric trading behavior with respect to gains and losses. The evidence is strong that these traders hold losing trades longer than gains. However, we are unable to discover any contemporaneous measurable costs associated with this apparent aversion to realizing losses. Thus we conclude that no evidence exists of a costly disposition effect among this group of traders. Absent evidence of costs associated with holding losses longer than gains, we seek other explanations, following the suggestion in Fama (1998) that evidence of behavioral problems is often consistent with rational behavior. First, we find that the evidence that traders hold losses longer than gains is sensitive to the benchmark choice. While the zero benchmark is natural, and evidence using the zero benchmark indicates that traders hold losses longer than gains, the strength of the evidence dissipates using expected income benchmarks. Regardless of the benchmark, we find no evidence of contemporaneous costs associated with holding losses longer. Second, we find no evidence that success is contemporaneously related to a tendency to hold losses longer than gains. The effect appears to be prevalent across trader success groups. We conclude that no evidence is available of a costly disposition effect among professional futures traders, but that a relative lack of discipline in realizing both gains and losses promptly is harmful to the probability of success.