In a previous article we discussed a rather dramatic clash between traders and politicians here in the UK. That was Black Wednesday, also known as the first Brexit, and it was set in motion by Helmut Schlesinger (then president of the German Bundesbank – the country’s central bank). In an interview, Helmut suggested a dramatic change of direction by the UK Government of the time (1992), which acted as the starting gun for a purge of sterling.
In a recap of those eventful few days, Helmut told the BBC in 1997 that he had assumed, perhaps somewhat naively, the words he told the journalist were off the record, but he knew what effect they would have once out. This story resonates through to 2016 when a statement from Vote Leave spokesman Nigel Farage appeared on Sky News appearing to concede the European Union referendum: “It’s been an extraordinary referendum campaign, turnout looks to be exceptionally high and [it] looks like Remain will edge it.” Two years on and it’s clear Remain didn’t edge it. So why would a man full of confidence in his message before the big day concede defeat before votes had been counted? Where was he getting his information from? And what impact did his words have on the financial markets? The answers to these questions revolve around one central theme: opinion polls.
Few Words, Big Impact
After this concession, the value of the pound during
tthe EU referendum reached its highest mark in six months. Bloomberg reported:
“Behind the scenes, a small group of people had a secret – and billions of dollars were at stake. Hedge funds aiming to win big from trades that day had hired YouGov and at least five other polling companies, including Farage’s favourite pollster. These hedge funds were in the perfect position to earn fortunes by short selling the British pound.”
Unlike the traders of Black Wednesday, who were reacting to the government’s desperation and forcing their hand through pressure, some believe the market was being manipulated during Brexit to fit in with a preconceived hedge fund agenda. This doesn’t concern the result of the referendum, rather the information from pollsters that hedge funds paid top dollar for. According to Bloomberg:
“Some hedge funds gained confidence, through private exit polls, that most Britons had voted to leave the EU… These hedge funds were in the perfect position to earn fortunes by short selling the British pound. Others learned the likely outcome of public, potentially market-moving polls before they were published, offering surefire trades.”
Pollsters Make and Measure Markets
While it’s in the interest of traders to get insights, it becomes problematic when private business can buy access to voting data that is restricted from public view (UK law restricts pollsters from releasing exit-poll data before voting ends). The troubles continue when we consider pollsters influence on the vote: “With one hand, pollsters fed the public information that affected the outcome and moved the markets. With the other, they sold data privately to clients betting on market moves created by their public-facing polls.”
There is, however, a further step involved; the outcome of polls themselves can have significant impacts on financial markets. A vote of confidence in a particular direction in a poll may shift sterling prices up, whereas a vote that’s too close to call would result in a more volatile, unpredictable market. According to reports, hedge funds commissioned secondary polls that would track and predict the polling data released to the public – they would then add in their more accurate polling data to speculate at the right moment.
With all this information, those with the insights were in a position to start short selling the pound. This involves borrowing a stock or share to have it sold for the current market price. The money for the sale is then given to the investor (or borrower in this case), and once the price drops, the investor then covers the new price of the stock or share he or she borrowed and keeps the profit. In that case of the Brexit result, the pound was trading at a six-month high of $1.50 on the back of the Vote Leave concession; those hedge funds with the polling information could ‘borrow’ pounds to sell at that new high price, wait until the Leave result was confirmed and cover the new cost of $1.32 and pocket the profit.
Bloomberg reported that Nigel Farage remains unclear on what information he received during the day of the referendum and from whom, saying in separate conversations that he was called by polling company Surveytion before the concession, and after the concession.
Certainly not the UK’s economy. However, a key contributor to the Brexit campaign, who happens to be a hedge fund manager, made a reported “£220m in the space of just a few hours,” through a Brexit-linked short sell on sterling that used data provided by polling company YouGov. Were traders reacting to the market or were the pieces simply falling into place?
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