The News: In Trading, Experience Counts

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When it comes to trading, experience matters after all. So say Cambridge University researchers who measured the risk-adjusted performance of 53 high-frequency traders in a study published in the Public Library of Science journal.

Reuters reports that the traders' Sharpe ratios increased markedly with the number of years they had been trading - a result suggesting that learning plays a role in increasing returns, the researchers concluded. The study also found that more experienced traders significantly outperformed the Sharpe ratio of the study's benchmark, Germany's DAX stock market index.

The results represent something of a vindication for traditional ideas about what makes a good trader. Recent attention has focused more on emotional and even biological factors such as testosterone levels of traders.

Co-author John Coates, a Cambridge research fellow in neuroscience and ex-Wall Streeter, focused on the Sharpe ratio rather than raw trading profits because the former adjusts profit by the amount of risk taken. Emphasizing risk-adjusted profits fits well with the current regulatory push to base traders' compensation formulas on risk along with profit.

However, the measure created by Nobel prize winner William Sharpe is applicable only when the probability distribution of all possible profit-loss outcomes is symmetrical. That could make it an unsuitable gauge for high-frequency trading.

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[AIG]

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