Retail Forex Trading and its Discontents: Beneath the Surface of Trader Behavior

Time for regulators to use science when they take their decisions and not just rely on a narrow set of

Last summer, none other but Microsoft Research committed funding to a project that is deeply engaging and very useful for the online trading industry. The Online Foreign Exchange Trading Project led by a team of experienced academics and researchers is committed to finding out more about the ways traders behave when making their decisions on the market.

The project is a novel study looking at online investment decision-making. The team uses high performance computing to create a detailed reconstruction of the trading decision-making process within retail foreign exchange. By using techniques such as machine learning, the findings from the study are aiming to become the drivers behind a trader’s decisions.

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The Microsoft Research-funded project will be the first open-source, result-driven project of its kind answering questions whether FX trading is a viable and feasible activity. In the current regulatory framework discussions the findings could be very useful to the industry, regulator and traders of course. Specifically, the project will explore microstructure models of how decisions are made and will investigate the behaviour and performance of traders depending on varying market conditions.

The Team Leading the Online Foreign Exchange Trading Project

The team that is leading the effort includes Professor Alexandru Preda, who is lead supervisor. He is a Professor of Accounting, Accountability and Financial Management.
He holds a PhD from the University of Bielefeld. Prior to joining the Department of Management at King’s College he worked at the University of Edinburgh and at the University of Konstanz.

Alex is one of the world’s leading researchers of financial markets and his principal research activities relate to global financial markets, and his research interests include: strategic behaviour in financial markets, decision-making and cognitive processes in electronic anonymous markets, market automation and trading technologies, valuation processes in markets, the role of communication in decision-making processes, the public understanding of finance and the governance of global finance.

Joining him are researchers Dr. Roland Gemayel and Mr. Demetrios Zamboglou. Roland Gemayel holds a PhD in Finance from King’s College London, a Master’s of Science in Finance from Cass Business School, and a Bachelor in Business Administration from the American University of Beirut. Roland has multiple years of investing and consulting experience with companies including Deloitte & Touche, and he is currently working on research projects revolving around the topic of social trading.

Mr. Demetrios Zamboglou holds a Master’s of Science in Finance from Cass Business School and a Masters of Engineering from Lancaster University. He is an award-winning forex executive with more than a decade of international experience including general management of both small and large brokerage firms, risk management, compliance, market-making, product development, business operations and strategy.

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Aims of the Research Project

There are various questions which the study is aiming to answer. At a time when regulators are looking closely at protecting traders more effectively, is the performance of retail FX traders homogenous? Or in other words, do all traders behave the same in the retail FX market?

Regulators will need to take their decisions based on facts if they are to regulate the industry more tightly than expected. Questions like whether retail FX traders are skilled and if they can generate profit on a consistent basis are key for the financial overseers.

The fact that the majority of traders lose money does not warrant that the high leverage market should be closed to everyone. The Online Foreign Exchange Trading Project can answer questions such as what the behavioural biases of skillful traders are and how market volatility affects a trader’s behaviour, skills and performance.

“This is a ground-breaking project, which will provide answers to issues that regulators have struggled with due to limited access to retail foreign exchange data,” Mr Demetrios Zamboglou, one of the lead researchers on the project, shared with Finance Magnates.

  • What is the effect of ‘leverage’ on traders?
  • Should there be stricter limits on the amount of leverage used by retail FX traders?
  • Does leverage affect trading performance?
  • Do skilled traders use more leverage?
  • What is the effect of market volatility on performance?

20,000 Retail Traders with around 7 million Trades

Speaking to Finance Magnates, Mr. Zamboglou elaborated of the data used in the study: The project is analysing more than 20,000+ retail FX traders with around 7 million trades spanning across 3 years. We have used as much data as possible in order to better understand the investment process and behavioral patterns within trading. The transactions are timestamped which allows us to conduct our analysis more accurately compared to other studies that use daily or weekly aggregated information. The data is obtained directly from regulated brokers rather than third-party data providers, which enhances the accuracy of our conclusions.”

The project is open source, a decision that is in line with the goal to democratize access to scientific data.

“Each and every person has the capacity to start trading at the retail level, and every individual will have different trading experiences which gives them a unique perspective on trading. As such, the project will be open-source because the perspectives of different individuals will only add to the richness of the study. In the end, this study is about the performance and behaviour of retail FX traders, so it seems only logical to involve and learn from those who are involved first hand,” Mr. Zamboglou explained.

The project has already been already running for six months. Mr. Zamboglou said: “One thing to keep in mind is that we are dealing with a very large and dynamic data set, thus computations can take a long time to complete and fully understand the implications. With the help of the Microsoft Research Grant we aim to use high performance computing to reduce the time needed to obtain results and publish our findings for the wider public.”

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