Study: how ambient noise affects trading performance
/A new study has shown the impacts of ambient sounds on financial traders’ ability to perceive financial risks and offers suggestions on how to maximise workspaces for efficiency.
The University of NSW Business School research took advantage of the natural experiment created by the pandemic and everyone working from home. This situation, the researchers say, had a huge impact on the world of trading and risk management. The researchers, Professors Elise Payzan-LeNestour and James Doran, wanted to examine the impact of ambient sound on a trader’s ability to perceive market risk.
The researchers interviewed professional traders and set up three lab experiments, showing that the buzz of trading floors sharpened a trader’s ability to assess risk in markets during prolonged episodes of extreme volatility, but impaired it during the transition phase up or down.
What’s so special about market transitions versus extreme market volatility?
From March 2020 and throughout most of 2021, some traders may have benefited from working from home (read: with less ambient noise), allowing them to better perceive risk in the transition periods. Conversely, during periods of high and sustained volatility (for example during the first few months of the pandemic) the buzz actually improved trader risk perception.
Some institutional investors lost some of their edge compared with retail investors when moving into the home environment, moving away from the buzz and into the quiet. It’s not about avoiding the noise or seeking it, but about when to be amongst the buzz of the trading floor and when to be quiet.
Additionally, whether a trader should seek the buzz or not depends on their main trading strategy. A day-trader who is managing a lot of swings and roundabouts needs to feel the buzz. If you’re all about timing, stay in the quiet zone.
