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How noise impacts trading performance

Did trading desks perform better or worse when they were forced to work from home last year? That is the question UNSW Business school researchers sought to answer.

A study by UNSW Business School associate professors Elise Payzan-LeNestour and James Doran looked at how ambient sound affects financial traders' abilities to perceive financial risks.

The researchers interviewed professional traders and conducted three laboratory studies to test judgements of financial asset risk.

In short, their findings showed the buzz of a trading floor sharpened traders' ability to properly assess risk in markets during prolonged episodes of extreme volatility - whether that volatility was very high or very low.

However, during the sharp transition phase from low volatility to high (or vice versa) the noise of the trading floor impaired the ability of traders to assess risk in markets.

The findings suggest that some traders may have benefited from working from home from mid-March 2021.

And, on a wider scale, the move to working from home could have even improved market efficiency as almost all traders were at home during a period of extreme volatility.

"If you think about what the markets were like pre-COVID, from November 2019 to February 2020, we knew COVID was out there, but the markets didn't think it was a big deal, and volatility was low," Doran said.

"The financial markets during the first two months of 2020 were still in a low volatility market regime - a long-term, persistent state where markets behave normally. However, the move to high volatility can happen suddenly, known as the transition phase."

In the second week of March, the researchers said, volatility as a number surged from 17% to 85%.

"Our findings suggest that the manager could have benefited from not being on an active trading floor during the transition because they could have missed out on returns," Doran said.

The findings suggest that during that initial shift towards volatility, working from home would have been beneficial. But, as volatility continued, traders could have benefited from the ambient noise of the office.

Payzan-LeNestour suggested that trading desks should be smart about implementing this information - acknowledging that it's neither helpful to work in silence all the time or with noise all the time.

"So, if I'm into market timing strategies and I'm forced to work from home, I might actually benefit from recreating the noise of the trading floor via headphones," Payzan-LeNestour said.

"There is evidence that sound presented in peripersonal space (close to the head) is more arousing than sound presented further from the head (for example, if it emanates from the surroundings)."

Read more: UNSW Business SchoolElise Payzan-LeNestourJames Doran