Payday Matters: A Look at Trader Behavior within Pay Cycles

摘要

Security firms typically link trader compensation to performance. We examine how this influences traders to allocate their trading efforts over time. Traders employed at a U.S. broker- dealer trade more actively on their last day of trading in a monthly pay cycle. Traders intensify their trading at the very last moment in order to increase their ensuing compensation payout. We label this behavior the payday effect. The payday effect is correlated with traders' monthly cumulative income to date. When traders are close to breaking even as the pay cycle draws to a close, the payday effect is not (much less) significant. However, payday effects become more pronounced when traders' cumulative income deviates further away from the break-even point in either direction. Our findings suggest that when incentive compensation schemes exhibit in- frequent evaluation, traders have a tendency to self-evaluate their performance prior to the pay cycle close and these self evaluations influence trade decisions.