‘Margin trading should be regulated like gambling,’ says University of Leicester research
Researchers in the Department of Economics at the University of Leicester have analysed the behaviour of margin traders and have concluded that, like gambling, those doing it find it enjoyable even though, on average, they lose money.
Margin trading allows an individual to borrow money from a broker in order to take much larger positions in financial assets and therefore multiply the size of their gains and losses. In their paper "Margin Trading: Hedonic Returns and Real Losses" (available here: http://bit.ly/1Vi2BUf), researchers in the University of Leicester's Department of Economics found that, despite the expected monetary losses, margin trading offers the same enjoyment associated with playing the lottery, holding lottery-type stocks, and gambling.
One of the researchers, Dr Daniel Ladley, both a Reader in Finance in the Department of Economics at the University of Leicester and Deputy Director of the Leicester Institute of Finance, said: "It is hard to rationalise this form of trading without a hedonic motive, as such, it is most easily understood as a form of entertainment. From analysing the behaviour of large numbers of individuals trading on margin, it can be seen that the vast majority of them lose money whilst also preventing the market from functioning correctly. If this type of trading is to be seen as entertainment, there must be implications for future policy and regulation. In particular, a system which separates those trading for hedonic reasons and those trading for investment may have many advantages. Such a separation may limit any destabilising effects of margin trading on overall systemic stability. A large sell-off in stock would be less likely to result in negative-spirals and crashes."
Download paper "Margin Trading: Hedonic Returns and Real Losses" here: http://bit.ly/1Vi2BUf
Download a photograph of Dr Daniel Ladley from: http://bit.ly/1YaPSRi
Dr Daniel Ladley