There are not a lot of women on the trading floors of investment banks. As our research has shown in the past, women constitute around 15% of traders in investment banks, and that proportion seems to be falling. The situation is even worse at major hedge funds. At Brevan Howard, just 6% of registered employees in London are women. At BlueCrest Capital Management, around 7% are.
That’s a shame. New research by Financial Skills, a trading profiling company founded by a group of ex-traders from Merrill Lynch suggests that women make far better traders than men.
“We found that men take more risk than women,” says Financial Skills COO David Hesketh. “That would be fine if they also made more money – but they don’t.”
Financial Skills runs real time trading simulation software. Last summer, 326 interns in investment banks traded on its system. Their results were combined with those from around 400 previous trading juniors. The junior traders lost money – Hesketh says this is standard. But the results showed that female traders lost less money than men. They also showed that men were far more likely to transgress specified trading limits.
“We told the traders participating in the simulation that they had to follow specific rules,” says Hesketh. “They were only allowed to trade first thing in the morning, for an hour at lunch, or after 5pm. Outside those times we asked them neither to place trades nor look up prices. We did not physically prevent them from breaking the rules but told them there was a certainty that we would find out if they did.”
Although juniors said they had no intention of breaking the rules, Hesketh says it was inevitable they would. “In our experience, everyone breaks the rules. It’s just a question of how often.” What was notable, however, was that male traders broke the rules 2.5 times as much as women. “That’s a huge statistical deviation,” Hesketh says.
(Forbidden actions=placing data requests and trades in prohibited time periods.)
Nor was this all. Despite being less profitable than women, male traders placed a higher volume of trades (shown in ‘trade slices’) than women – thereby generating higher brokerage fees and settlement costs for banks. They were also significantly worse at going short than women were – suggesting that hedge funds with equity/long short strategies are foolish not to have more females on their desks.
“Interestingly,the women also traded fewer times than the men. In a world where every cost matters, reducing a bank’s brokerage costs would be a helpful contribution,” says Hesketh. “The data suggests that if you choose to employ men over women, you will make less money using more capital, you will have higher transaction costs and you will need a more robust risk and compliance team,” says Hesketh.
Only a handful of high profile traders are women. Leda Braga, formerly of BlueCrest is one. Angelie Moledina at Moore Capital is another. Nehal Chopra’s Ratan Capital Management has generated returns averaging 20% a year for the past five years.
Hesketh predicts that his research will change banks’ approach to attracting women to the trading floor. “A couple of the banks we worked with over the summer asked us to present our findings to their steering committees,” he says. “In future, banks won’t be ticking a diversity box because it’s politically correct, but because by doing so they will create a business that’s more profitable and less risky.”
Recruitment firm Alexander Mann is already presenting Hesketh’s research to its clients. Jo-Ann Feely, global client partner for investment banking, says the findings are the missing component in the diversity debate. “Previous industry research has focused on the moral imperatives underpinning workforce diversity, and there has been less of a focus on the ROI arguments. This research will hopefully prove that a more diverse workforce can lead to better business results, lower risk and a more productive workforce.”