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Human factors in financial trading: an analysis of trading incidents

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  • Leaver, Meghan
  • Reader, Tom W.

Abstract

Objective: This study tests the reliability of a system (FINANS) to collect and analyse incident reports in the financial trading domain, and is guided by a human factors taxonomy used to describe error in the trading domain. Background: Research indicates the utility of applying human factors theory to understand error in finance, yet empirical research is lacking. We report on the development of the first system for capturing and analysing human factors-related issues in operational trading incidents. Method: In study 1, 20 incidents are analysed by an expert user group against a referent standard to establish the reliability of FINANS. Study 2 analyses 750 incidents using distribution, mean, pathway and associative analysis to describe the data. Results: Kappa scores indicate that categories within FINANS can be reliably used to identify and extract data on human factors-related problems underlying trading incidents. Approximately 1% of trades (n=750) lead to an incident. Slip/lapse (61%), situation awareness (51%), and teamwork (40%) were found to be the most common problems underlying incidents. For the most serious incidents, problems in situation awareness and teamwork were most common. Conclusion: We show that (i) experts in the trading domain can reliably and accurately code human factors in incidents, (ii) 1% of trades incur error and (iii) poor teamwork skills and situation awareness underpin the most critical incidents. Application: This research provides data crucial for ameliorating risk within financial trading organizations, with implications for regulation and policy.

Suggested Citation

  • Leaver, Meghan & Reader, Tom W., 2016. "Human factors in financial trading: an analysis of trading incidents," LSE Research Online Documents on Economics 66307, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66307
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    File URL: http://eprints.lse.ac.uk/66307/
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    References listed on IDEAS

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    1. Willman, Paul & Fenton-O'Creevy, Mark & Nicholson, Nigel & Soane, Emma, 2002. "Traders, managers and loss aversion in investment banking: a field study," Accounting, Organizations and Society, Elsevier, vol. 27(1-2), pages 85-98.
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    Citations

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    Cited by:

    1. Cormac Bryce & Thorsten Chmura & Rob Webb & Joel Stiebale & Carly Cheevers, 2019. "Internally Reporting Risk in Financial Services: An Empirical Analysis," Journal of Business Ethics, Springer, vol. 156(2), pages 493-512, May.
    2. Meghan P. Leaver & Tom W. Reader, 2019. "Safety Culture in Financial Trading: An Analysis of Trading Misconduct Investigations," Journal of Business Ethics, Springer, vol. 154(2), pages 461-481, January.
    3. Thomas Spooner & John Fearnley & Rahul Savani & Andreas Koukorinis, 2018. "Market Making via Reinforcement Learning," Papers 1804.04216, arXiv.org.
    4. Leaver, Meghan & Reader, Tom W., 2017. "Safety culture in financial trading: an analysis of trading misconduct investigations," LSE Research Online Documents on Economics 69210, London School of Economics and Political Science, LSE Library.
    5. Joseph Jerome & Gregory Palmer & Rahul Savani, 2022. "Market Making with Scaled Beta Policies," Papers 2207.03352, arXiv.org, revised Sep 2022.

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    More about this item

    Keywords

    financial trading; human error; system design; risk; teamwork; situation awareness;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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