If academics who studied the trading behavior of stock market participants in major financial centers and the tipping behavior of several million taxicab passengers consider sunny days to create optimistic and enthusiastic spending and trading, perhaps the retail FX brokerages could be on to a very cost effective retention and volume boosting method
In the 1970s, establishments in Chicago that now hold the widely accepted accolade of being the most sophisticated electronic derivatives marketplaces in the world used to offer futures contracts on weather prediction.
These very early forms of exchange traded retail binary options contracts meant that any member of the public could place a ‘bet’ with a fixed contract expiry and a predetermined outcome with very little need to analyze the markets or possess knowledge of electronic trading.
Whilst these contracts continue to exist today, with CME being a major provider for the last 45 years of such a contract, very little is mentioned about them and they are by far and away a lesser range of derivatives offered by the exchanges of State Street and Michigan Avenue.
Trading the actual outcome of weather forecasts, therefore, is clearly passe, however what about the actual effect that the weather itself has on the mood of a trader when trading other asset classes on a spot basis?
A little considered motivator toward trading that is not part of the sales mantra within many retail brokerages is the effect that sunny weather has on trading, and its long standing position as a subject of research by financial markets academics.
Back in 2003, two university professors published a report called “Good Day Sunshine: Stock Returns and the Weather”, which investigated the psychology behind such behavior and the patterns in trading that it created.
Professor David Hirshleifer of the University of California at Irvine and professor Tyler Shumwa of the University of Michigan both believe that the weather and the color of the sky and outlook have a significant bearing on the behavior of traders.
In their report, the relationship between morning sunshine in the city of a country’s leading stock exchange, and daily market index returns across 26 countries over 17 years was examined. Sunshine was strongly significantly associated with stock returns. The difference in expected return between a completely overcast day and a sunny day was found on average to be about nine basis points – though this could climb to approaching double this in some trading centers, such as New York.
Now, several years later, two further academics have built on this, looking at similar effects on the spending behavior of people on sunny days by examining the data from 13.82 million cab rides from January to October 2009 in New York City, combined with statistics on hourly levels of solar radiation, and documented the results in their study entitled “Taxicab tipping and sunlight” which found a significant positive relationship between sunlight and tipping.
Perhaps therefore, if such patterns can be considered consistent over long periods of time with enough people in enough different regions (which have different climates and business/spending/investment cultures) then sales teams within FX brokerages may well be able to use weather data to approach their client bases on particularly sunny days, or the first sunny day after a long period of inclement weather.
The original study back in 2003 by Professors Hirshleifer and Shumway found that traders could make money with an investment strategy based purely on predicting market movements from weather. There was potential profit in trading on the sunshine. However, because weather can be very changeable, this investment strategy would involve a lot of trading, so if transaction costs were high, this would begin to eat away at profits.
The authors argue that there must be something psychological going on to explain this effect, since the impact of sunshine applies to markets across the globe, however the recent study that examined taxicab tipping habits and how they are affected by sun is particularly relevant in that it depicts the same type of behavior in a vast general cross section of the general public, which actually represent the potential and existing client bases of retail electronic trading companies.
This is a “mood” theory which, very broadly, depicts that if people are put in a positive frame of mind, this affects the way they trade.
With retail trading firms having to continually concentrate on ROI with regard to onboarding clients and ensuring that they are engaged enough to trade to profit for both trader and brokerage, and acquisition costs at an all time high, combined with advertising limitations by Google and Facebook, the need to maximize an existing retail client base whilst keeping the cost of doing so down has never been more important.
This, therefore, is a cheap and easy mood theory that perhaps should be considered by retail brokerages worldwide.
Right, it’s raining today, so I’m counting the pennies.