When risk-takers are screened ...

What will happen to Liffe floor traders when the market is all- electronic? Nick Shannon contrasts the psychology of pit and keyboard workers
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The Independent Online
Liffe, the London International Financial Futures and Options Exchange, is finally coming to grips with the possibility that its traditional "open outcry" trading system may be rendered obsolete by new technology already used by trading exchanges across the world, and - in Liffe's case particularly - Frankfurt. Liffe is building its own electronic trading system to come on stream before the year 2000, and in today's competitive financial markets, five will get you ten that "open outcry" will soon be abandoned.

What will happen then to Liffe's colourful (both in clothing and in language) floor traders? Some will want to try their hand at screen-based trading, but will they be as successful when removed from pit and put in front of monitor and keyboard? To answer such a question we need to look at the psychological make up of City dealers and traders, and what their jobs really involve. From the perspective of an occupational psychologist, not many of Liffe's floor traders will successfully transfer their skills to an electronic trading system.

There is an important distinction between open outcry dealers and electronic screen traders. Both are engaged in figuring out the direction of the market and acting accordingly. But dealers are less interested in the overall direction of the market, and more short-term in their thinking. They act as market-makers, quoting buying and selling prices, which gives them an "edge" over other market participants. They buy at their buying price and sell at their selling price. If they do so simultaneously, they instantly make a profit - so they often make money despite being incorrect in their assessment of market direction. Floor dealing is usually a short-term activity, with deals commonly lasting only a few seconds between purchase and sale. Dealers have to make rapid decisions. They have no time for analysis; they must use their intuition and gut-feel.

By contrast, electronic trading is a longer-term activity. Although there are some market-makers, most traders enter the market of their own volition, buying at the offer price and selling at the bid price, thereby giving up the "edge" that goes into the market-makers' pockets. The traders can make money only if they are correct in their judgement of market direction, because they must cover the cost of making the trade. Intuition and gut- feel are less important than logical analysis and sound trading methodology.

A big difference between successful and unsuccessful screen traders is their level of emotional control. Few jobs are as emotionally demanding as trading large sums of money in volatile markets. Just think how excited people get at the race course, when they put on a pounds 5 bet. Multiply the pounds 5 by a factor of 10,000 or 100,000, and imagine the effect. That's what futures traders live with, minute by minute. Now consider how difficult it is to make carefully judged decisions when you are in a state of high excitement or fear - when your heart is pounding and your hands are shaking. This is what screen-based trading demands: cool, careful, deliberate calculations as to which way the market is heading.

Do Liffe floor traders have the emotional control for screen trade? One measure that psychologists use to gauge people's ability for emotional control is the distinction between type A and type B personalities. Typically, type A individuals:

l move and eat rapidly

l feel impatient with the speed of most events

l strive to think or do two or more things simultaneously

l cannot cope with leisure

l are obsessed with numbers, measuring their success in terms of how much of everything they acquire

Type Bs, on the other hand:

l never suffer from a sense of time urgency or impatience

l feel no need to display or discuss their achievements unless such exposure is demanded by the situation

l play for fun and relaxation, rather than to exhibit their superiority at any cost

l can relax without guilt

We have not researched exactly the degree to which Liffe dealers are type As, but we suspect that they are mostly type A. Type As are particularly attracted to the idea of being dealers, ambitious as they are for money, excitement and risk. Their sense of urgency is an asset when it comes to quick-fire thinking. They think and react fast, and their competitive nature drives them to work hard to achieve results. The downside is that they react emotionally to circumstances. For example, they are impatient. This makes it difficult for them to follow the two golden rules of screen trading: Run your profits, and cut short your losses. Impatience to consolidate a profit, and anxiety that a profit may reverse into a loss, are powerful influences on decision-making. Research has shown that people are more risk adverse when they are in profit than when making a loss. When losing money, they make riskier trades, hoping to recoup the loss. Type As' lack of emotional control and susceptibility to anger makes them prone to indulge in "vengeance" trades.

So, while the Liffe floor traders are well suited to what they do at the moment, some companies will find they have the wrong animal once electronic trading systems take over.

The writer, a partner at Acker Deboeck, occupational psychologists specialising in senior management selection and assessment, has also worked at GNI, brokers on the Liffe market.

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