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Feel like reading a PhD thesis?

PhDAt last!

On Wednesday my internal examiner approved the edits I did to my PhD thesis and I submitted it to the school’s online repository. That’s the last of the requirements on my end. All that’s left is for formal approval to be given by the Vice Chancellor’s Executive Group, which should happen this week (if it hasn’t already by the time you’re reading this). Then the long PhD process will truly be complete!

The title of my thesis is Trader Leverage Use and Social Interaction: The Performance Implications of Overconfidence and Social Network Participation on Retail Traders.

Here’s the abstract:

Overconfidence and its relationship to investor market participation is well established in the finance literature. The research into investors and social networks is only in its infancy, however. This thesis extends the literature by expanding on both subjects individually, then bringing them together.

Empirical work on individual investors in the existing literature links overconfidence and excess trading, resulting in impaired returns. The preferred activity metric, monthly account turnover, encapsulates two separate elements, though. One is trade frequency. The other is leverage use. Chapter 4 of this thesis theorizes based on the existing literature that in fact trade frequency is not a good measure of overconfidence. It then demonstrates through empirical analysis of a group of individual non-professional foreign exchange traders that leverage is much more suitable to that role.

Chapter 5 turns the focus to social networks, particularly with respect to information transfer. The literature in finance anticipates that network members benefit from their membership. Further, network position (social capital) enhances that benefit. This thesis challenges that expectation with respect to non-professional investors. Findings based on analysis of members of an online retail foreign exchange trader social network indicate that while there may be an educational benefit accruing to unsophisticated members, for more sophisticated ones membership appears to have a negative effect on returns.

One potential explanation for the negative impact of network membership is explored in Chapter 6 in the form of impression management. It is hypothesized that sophisticated investors are influenced in their behaviour by the realization they are being observed, and also the size of their audience. Analysis of foreign exchange traders indicates an increase in leverage use among sophisticated investors as their audience size increases, coinciding with a decline in trade excess returns, making the case for an observation-based rise in overconfidence.

Naturally, the thesis is heavily academic. I tried to make it as readable as possible, but you can only take things so far given expectations for language and style. If you want to have a look, you can get a PDF copy here.

The page count is 240, though there are a lot of tables. If you do actually read it, I’d be happy to hear what you think.

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New Years Greetings

HappyNewYearWelcome to 2016!

You won’t be getting a 2015 trading and/or market recap from me. If you’re really looking for something like that, I’m sure there are plenty of other places you can look who’d do a much better job than me.

My focus last year was on getting my PhD thesis completed and otherwise finishing my degree requirements. That occupied a lot of my attention, as you might imagine. The funding I was provided by the university was due to run out at the 3-year mark, or when I did initial submission of my thesis, whichever came first. It’s a strange set-up since in theory it could still be several months from there before you do final submission between waiting to go through the defense and then making edits and submitting the final copy.

Basically, it didn’t make any sense for me to do initial thesis submission until I got myself a new source of income – or before September when the funding ran out. In the end I decided to take a job in Sweden. Basically, the idea was to find something that would keep the funds coming in while finishing up my degree requirements. Having some new experiences along the way wouldn’t hurt either.

So here I am in a small town outside Malmö, coaching a women’s professional team in the top division of Swedish volleyball. I coached in the US at the college level for several years, including during the time when I was writing The Essentials of Trading and developing this website. I’m on an 8 month contract. It doesn’t pay that much, but I’ve got free housing and a good amount of time to get back to the markets and trading – especially now that I’ve basically finished up the PhD stuff (just need to turn in the final edits once everyone is back on campus).

So bring on the new year!

At the top of my list is to rewrite The Essentials of Trading. This year is the 10th anniversary of the book’s release. Seems like a good time to write an updated version. While a lot has happened in the markets since 2006, and there have been some developments in the industry, the fundamental things I wrote about haven’t really changed. I’d like to think I’ve gotten better at communicating the ideas. Plus, there’s stuff from my PhD research that can definitely be incorporated in the new version.

Of course you can expect regular blog posts once again. I’ve already started to become more active in trading forum conversations. I’m actually kind of excited to get back into things.

Hope you like the site’s new look. 🙂

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You may now call me Doc

Well, I’m not sure what the timing is in terms of when the degree is officially conferred, but effectively it’s a done deal. I’m a freshly minted PhD. 🙂

PhD

On Monday I was back in Exeter doing what they call “viva” in UK academic terms. It’s roughly equivalent to what would be referred to in the US as a doctoral defense. Basically, I met with my two examiners – one from the Exeter faculty (internal) and one from another university (external) – in this case from the University of Reading. They received copies of my thesis shortly after I submitted in in early October, reviewed it, then discussed their views on it between themselves.

By the way, the title of my thesis is:

Trader Leverage Use and Social Interaction:

The Performance Implications of Overconfidence and Social Network Participation on Retail Traders

The viva was basically me talking about the thesis with them. I was asked to do about a 5 minute summary and then we went over the full document. They asked questions about the theory that went into it and the analytic methods I used, and pointed out a handful of minor issues. I then left the room for a couple minutes as they conferred.

When I was called back in, they shook my hand and congratulated me. The official result is I’ve been awarded my doctorate subject to completion of minor corrections to the thesis. Yesterday I was provided a list of those corrections (they really are minor) by the internal examiner. I’ll get an official letter shortly with the same details. Once I’ve made the corrections, I’ll have to submit the final thesis along with a letter outlining the corrections I made to my supervisor and that will basically complete the process.

And so ends 3+ years of struggle and strain!

As I’ve talked about before, I want to turn my work – and/or an extension thereof – into a practical book for traders.

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Phase I of my PhD finally complete!

Yesterday I got official word from the university that my PhD thesis has been accepted for examination. Oh, happy day! 🙂

I finally have a complete thesis after three years of research, running an untold number of regressions and other forms of statistical analysis, and writing. It’s about 75,000 words in length.

Don’t start calling me Dr. Forman just yet, though.

The next step in the process is what is known as my viva. It’s roughly equivalent to what in the US system would be called a defense. I have an internal examiner who is on the faculty at my own university (Exeter) and an external one from another university (Reading, in this case). They are both being provided copies of my thesis to review. In early December I will meet with the two of them to talk about it all, at which point they will tell me their judgement. Basically, that’s one of three results:

  • Accepted as is
  • Accepted with minor corrections
  • Accepted with major corrections

Most people get the second one, which is meant to include edits not expected to take more than 12 weeks. Generally speaking, if you fall into the last category you have some major work to do and your supervisor(s) probably shouldn’t have let you submit.

Odds are, I’ll end up in the second category, so some time in early 2016 I should be done once and for all.

The is academia, though, so you never really stop. Between now and my viva I need to develop at least one publishable paper out of my thesis content, and potentially two.

From a non-academic perspective, I want to finally get down to developing something of practical use to traders based on my work, and a bit of extra analysis I want to do.

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Actually retail forex brokers, it is your fault

I get it FXCM. You’re trying to make sure you don’t take the blame for the damage done to customer accounts by the dramatic moves in the Swiss franc thanks to the Swiss National Bank removing its support for EUR/CHF. For me, though, the much bigger issue is the risk management side of things for the business. You nearly had one event take down the company. So while the losses suffered by your customers because the markets moved so fast standing orders couldn’t be filled is not your fault, the fact that you had to secure some quick emergency funding because you effectively are in a short option position with regards to customer accounts most certainly was.

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As good as a coach on call 24/7

Had an email come in the other day from a book reader named Patrick. He said:

“John, I reviewed your book. My honest impression is that it is the most practical book on trading I ever came across. I’ve read several good books on forex, but found that I could hardly apply whatever I learned. My impression is that your book will be as good as a coach on call 24/7.  I sincerely believe it will shorten my learning curve.”

It’s great to hear readers still find [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] helpful even though at nearly 10 years old it is probably considered dated by many people’s standards. While admittedly some of the examples could be freshened up, the book was written based on a set of common, consistent principles – not the latest hot fad in trading.

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Credit card bans and the future of US retail forex

Last week I brought up the subject of a prospective new NFA ban on the use of credit cards to fund accounts in retail forex. There has been considerable discussion about this, as tends to be the case any time the regulators come out with new rules (or at least plans for them). Once more we are hearing the claim that the NFA (and CFTC) is out to kill retail forex in the US. A blog post at Forex Magnates on Friday definitely takes that view. I have a hard time agreeing with this.

Let me pick on one particular comment:

NFA has gone a long way trying to completely kick retail forex out of the US eventually reducing the number of retail forex brokers from several dozens to just 11. With FX Solutions heading out as well the number of US forex brokers may fall below 10 within few months.

There’s no doubt we have fewer US forex brokers now. Is that a function of NFA/CFTC regulations? In some cases, I’m sure it is – especially when we talk about minimum capitalization rules that were put into place. I would contend, however, that such consolidation is simply a natural product of a business that is maturing.

Think about what we’ve seen in retail forex in the last decade or so. Topping the list is the way bid/ask spreads have come down very sharply. This means less income for the brokers, most of whom operate in some fashion on a dealer-based model. To put it another way, profit margins have been squeezed considerably. Any time that sort of thing happens industry-wide you get consolidation as those companies unable to compete either go out of business or get absorbed by those who can.

I would suggest we’re likely headed for a handful of major US forex brokers. We need only look at the stock market to see how few big brokers there are in that sector despite the fact that it features a bigger customer base.

Now, this is not me disagreeing with many of the arguments against the NFA credit card ban. I actually think it’s somewhat silly in a lot of ways given the many ways customers can access and move around money. If avoiding the use of borrowed money is the main focus (and I’m largely in agreement on that) then this ban only makes it slightly harder, as others have noted.

One question I would bring up, though, is that of expenses. Who foots the bill for credit card transaction fees, which are generally in the 2%-3% range? My guess is in most, if not all, cases it is the customer paying that bill. Preventing the use of cards from that perspective automatically keeps traders out of a performance hole. This game is hard enough as is, as I observed in Starting to detail forex profitability data.

I’d still love to hear your thoughts on the credit card ban, by the way. Feel free to leave a comment below, on Facebook, or Twitter @RhodyTrader.