Incorporating Human Behaviour

Joaquin Narro and Monica Caamano

In this chapter, we will introduce a few spanners into the systematic trader’s works. Human behaviour is an intrinsic part of trading, the effects of which may easily go unnoticed, with catastrophic results. When a systematic model is handed over to humans for implementation, it becomes subject to their behavioural issues. This is especially relevant in energy markets as they are prone to human intervention. Although some of the most liquid energy markets, such as crude oil or natural gas, can be traded almost entirely electronically, there remain many silos where manual intervention is unavoidable, as is the case for coal, emissions and most electricity markets, which are the source of many tradeable inefficiencies. Behavioural issues must be acknowledged and addressed so they do not lead to undesirable outcomes.

Discipline is the main behavioural consideration when implementing a systematic trading strategy that requires human intervention. We discussed, for example, the need to trade within settlement windows: when execution is handed over to humans, they need to be disciplined enough to keep within the boundaries of the settlement window.

THE MANAGER’S DILEMMA

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