Sterling volatility has rocketed over the past few weeks, as markets have digested the ups and downs of the opinion polls in advance of the EU referendum.
But if you think the sealing of the ballot boxes at 10pm on Thursday night will be the end of it (until UK stock markets re-open on Friday morning, at least), think again. For the few short hours after the polling stations close and the final result becomes clear could be a fertile hunting ground for traders.
Partly this is because anything could happen during those hours. While some markets have remained relatively sanguine about the EU referendum, sterling has risen and fallen sharply against other currencies as the picture that has emerged from the polling has shifted. Yet the opinion companies have little experience of polling referenda and much will depend on turnout, which is inherently uncertain.
Unlike a General Election, there will not be an official exit poll, so the contours of the result will not have been sketched out at the turn of 10pm (although hedge funds have reportedly commissioned private polling).
Also unlike a General Election, says IG’s head of dealing Matt Brief, the outcome will be binary: while markets might speculate that a victorious political party could jettison a manifesto pledge, in this case there is only a tiny chance that the people’s choice will be ignored. “The numbers and volatility implied in options markets means we’re talking about much bigger numbers.”
In these hair-raising hours, fortunes will be made and lost. So how can you go about trading referendum night?
How the results will come in
Counting will be done by hand at 382 regional centres. The Press Association has said it will be covering each of these events, so results should trickle through like a General Election, with smaller counts finishing first. Social media shouldn’t always be trusted, but it could give you the edge in terms of speed.
At 11pm, the first indications of turnout are likely to emerge, with the first few areas also declaring vote counts. From 3am until 5am, the actual results will come in quickly, and there should be a pretty clear picture of who is going to win by 4am. If the vote is very close, however, it may take longer, though 98 per cent of the results are expected to be announced by 6am.
In terms of how to trade the night, spread-betting companies offer 24-hour trading of thousands of markets, so you can still trade when markets are closed. Spread-betting allows traders to speculate on price movements – whether they will rise or fall. You profit when you’re right and lose money when you’re wrong, with the size of your profit or loss determined by how far the market moves in whichever direction, whether up or down.
Be warned: spread-betting is a leveraged product so you can lose many times your initial stake. You can, however, protect yourself against very sharp movements with tools like stop-losses (which close out your trade if the price reaches a pre-set level). Markets that are expected to move significantly on the result include sterling currency pairs, gold, UK markets, and European stocks.
What could move markets overnight
Obviously if the vote looks certain early on, any market moves will become clear quickly. But assuming it’s close, traders should pay particular attention to a number of signposts along the way.
First, the turnout. We should have an indication of what this will be quite early on. According to Standard Chartered, we’ll likely know 98.2 per cent of local area turnout results by 3am whereas by 4am only 69.7 per cent of local voting results will have been finalised.
Turnout is expected to be a big factor in determining the final outcome, with speculation that more people voting will help Remain. But this is “guess work”, says Brief. The Leave side might argue, for example, that they’ve more successfully engaged with the arguments that people care about, and a turnout over 70 per cent, say, might reflect that. But there’s little doubt, Brief says, “that people will rush to judgement very quickly”.
Second are the so-called bellwether districts. Standard Chartered has identified three that could indicate early on how the vote is swinging. Sunderland should declare around 12.30am, for example. According to political scientist Chris Hanretty, the closer the result is in that northern town, the better it is for Remain, as demographic factors mean that Leave should be about six percentage points ahead there. Other counts to watch include Swindon (declaring at 1am), a core district for Leave, and Stirling (1.30am), a core for Remain.
Before jumping in and shorting sterling just because Leave has stormed Remain’s redoubts, there are good reasons to be cautious. First off, volatility will be extreme and price movements unpredictable. “Sterling is going to be massive. It’s such a dangerous one to trade,” says David Morrison, senior market strategist at Spread Co.
Any private exit polling, even if it’s inaccurate, could feed into this. “I’m wary of getting sent a wrong signal somewhere along the line. I think it’s going to be very difficult for anyone to really make sense of what’s going on until the moves have actually happened,” he says.
“We find this quite often, even in General Elections. Think back to 1992, when the results started coming in and it looked like the exit poll was wrong. Do you react to that? Do you go with it and follow it?”
Similarly, says Morrison, it could be that traditional correlations break down in unpredictable ways. “If there’s a big move into the dollar [if it looks as if Brexit is likely], that should be bad for gold. But the two are safe haven plays, so both could end up rising at the same time.”
Adam Jepsen of Financial Spreads adds that, given that volatility could be “of a different magnitude” to other events, it “probably means the risk-reward ratio is skewed towards… plain nasty, hideous or disastrous”. There is a risk, for example, that even if you correctly predict the result of the referendum, “the markets could easily spike against your trade and close your position before you can make a profit”.
Nevertheless, points out Brief, people will have very different reasons for holding positions on Thursday night. Some might well be speculating, whereas others could be hedging against losses in their wider portfolio or for other personal reasons. “If you’re looking to move to Australia in the next year, you might be very worried about [sterling falling] and hedge your position 24 hours a day.”
Even for them, referendum night will be a wild few hours. So whatever you choose to do, it’ll pay to be extra careful. It’ll be a long night for traders – and if you don't fancy it, there's always the morning.