Image: UnsplashThe Bloomberg publication has published a
story about the cooperation of hedge funds with the organizers of the British election surveys. Thanks to them, financial companies have multiplied their profits many times, having managed to prepare for a situation where, contrary to forecasts and the first calculated results, the British voted for leaving the European Union. In our material - the main facts of the investigation.
Fluctuations in the pound sterling on the night of the vote
The Brexit referendum, during which residents of the UK made a decision on whether the country should remain a member of the European Union, was held on June 23, 2016. On the night after the referendum, the British currency made an extraordinary leap: first it rose on expectations that, by the end of the referendum, Britain would remain in the European Union, and by morning it had dropped to the value of 1985.
To date, the pound has fallen even lower and amounts to ~ $ 1.32 dollars. The situation that occurred because of the outcome of the referendum with the pound and the market as a whole, economists call the
Black Swan . This term applies to difficult to predict, rare events that have significant market implications.
Unfulfilled predictions
Since the start of the campaign to leave the EU, the dynamics of the pound have depended heavily on surveys published by British public opinion centers. Before voting, the most influential polls predicted that the UK would remain in the European Union.
On the night of July 23-24, the value of the British currency was intensively correlated with the news on the preliminary results of the vote. Traders' attention was riveted to the results of exit polls - polls of citizens who participated in the voting. By law, these data could be published only after the completion of voting. The market was waiting for publication exit polls and first reports from polling stations.
At first, the results were in line with forecasts: after 10:00 pm, Sky news channel reported that an online poll conducted for them by the well-known research center
YouGov confirms the preponderance of pro-European votes: 52% vs. 48%. Nigel Farage, a former resource broker and leader of
the United Kingdom Independence Party , in favor of secession from the EU, also reported on the likely defeat of the Brexit campaign. After that, at 22:52, the pound reached a record high.
As the counting of votes among traders, panic increased: for example, the message that appeared at 00:16 that in Sunderland 61.3% instead of the projected 53% voted for leaving the EU, after a minute caused a drop in the pound by 4%. Further events developed dramatically: all new messages about unfulfilled forecasts led to a further decline in the currency.
“Unexpected” result helped hedge funds make billions
Not for all market participants such a development was a surprise. According to Bloomberg that day, hedge funds aimed at winning trades hired YouGov and at least five other pollsters. Questionnaires sold hedge funds with critical information, including preliminary exit poll data.
For seven months, Bloomberg conducted interviews with more than 30 current and former heads of public opinion institutions, consultants and traders, almost all of whom spoke only on the condition that they would not be called due to confidentiality agreements. Survey companies said they believe Brexit gave one of the most profitable days in the history of its industry.
Profitable trading opportunities arise not only when receiving exit polls, but also whenever possible to prepare in advance for the fluctuations caused by public opinion polls. There are many ways to bet on a currency catastrophe, but derivatives are the main means for many hedge funds. Their existence means that hedge funds buying exit polls do not need to be made the right choice. They just had to be more right than everyone else. The more unexpected the victory, the greater the potential profit for hedge funds.
Not the first alliance of sociologists and financiers
According to Bloomberg, public opinion polls have learned how to make money on exclusive sales of data back in 2014 during the Scottish independence referendum. Then, YouGov's preliminary polls, published one and a half weeks before the vote, showed the Scots tendency to secede.
Subsequently, the experts noted the critical importance of this publication: the results of the survey caused panic among traders and the subsequent decline of the pound and stimulated the British government to make concessions if Scotland decides to remain in the UK. As we know, Scotland is not separated.
Insiders told Bloomberg that since the survey was published before the referendum, the company received many large proposals from hedge funds to receive the results of the next survey at least an hour before the publication, because it would have shook the market again.
Then YouGov refused this opportunity, and some of its competitors do not. Sources Bloomberg reported that Survation organized an exit poll and even before the end of the voting, sold its results to several of the world's largest hedge funds. The forecast turned out to be quite accurate and buyers received a multi-billion dollar profit.
What is the danger of "trade in opinions"
Relations between institutions of public opinion and hedge funds on the eve and on election day created a conflict of interest: on the one hand, sociologists study and inform the public, on the other, by influencing it, they help private clients to bet on market movements created by their own polls .
Another bottleneck is in the field of law. Despite the fact that the text of the norm states that before the end of the voting, providing to any group of the public data that were transferred to hedge funds is illegal, the norm can be interpreted in two ways, and there is no judicial practice in these cases in the UK.
The Bloomberg study has caused a resonance and is being considered by a committee of the House of Lords, formed to substantiate the voting results and their consequences. The Committee stresses that in view of the significant impact of such situations on democracy and public opinion, election campaigns require improved legislative regulation.
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