Tuesday, 25 April 2017

Election Nights - What can 2015, Brexit and Trump teach us?

Over the past two years I have traded three very distinct, extraordinarily unique and utterly disturbing political events. What follows is my attempt to distil the key lessons from these markets, even if I feel that the similarities to the impending General Election are quite low.

By way of background, I have only ever entered the markets after the polling booths have closed. There is no doubt that there is extreme opportunity before the polling booths close but that is beyond the scope of this post. Equally, whilst these markets have ended up with some of my largest 'one and done' profits, this has largely been on account of my refusal to hedge on account of diametric opposition to the eventual outcome. (not a recommended approach) Also, this post relies solely upon my memory so exact timings / odds may not be entirely accurate.

I would also note that at all times, my approach consisted on focusing on both the eventual outcome and side markets with multiple options. Clearly, I won't be contesting the markets as keenly this time around so I am not losing anything when I say that the latter is traditionally more advantageous. After all, the more options available - subject to sufficient liquidity - the more opportunity there is to take positions. Equally, at a time when the likelihood of an underdog win is considered highly remote, multiple option markets could turn into the only real trading possibilities.

Obviously it goes without saying that the initial reaction - be it exit polls or the first confirmed results are vitally important. In all three events, the expected outcome has been heavily queried.

In the UK, exit polls have been rather reliable for some time now due to the very precise methodology that has been developed. I would query the likely accuracy of the exit polls this time as I consider that local swings will be much more volatile than national, but these should provide an opportunity. These provide a RESET button, although knowing the initial base is highly critical for reasons I shall come onto. I still have recollections of a Conservative / UKIP coalition trading in double figures after the exit poll in the 2015 election. Whilst this may have been partially due to low volumes, my bemusement at this was on account of the polling that predicted no (or tiny) UKIP advancement. Certainly, the notion they would have produced enough MPs to be party to a coalition was easily double figures itself!

Equally, I recall in all three markets that the initial movement was held up (or even reversed) after a short while. It was almost as if the market did not trust what it had been told. However, if a football team goes 2 - 0 up; even if it is a Conference side against a Premier League outfit, you must a) consider the advantage they hold but b) consider the reasons for that advantage.

Now, that's not to say that a Conservative majority government in 2015 should have seen that plunge to odds on from double figures, or that the Newcastle vote should have made Brexit favourite, but was it really right that a dynamic shift in expectations moved the market from 1.06 to the 1.2s? Make no doubt about it - for me the better price to lay (a bet, not a trade - 1.06 was a ridiculous trading price) was 1.2 when there was clear evidence to support a leave victory.

Political trading for mine also differs from normal trading in that I do not recommend an exit point. To start with, these are short events subject to rapid changes so stakes should be applied that you are comfortable with. However, the potential market movement and event developments are so diverse that you cannot accurately plan. What may look like value at one moment can be instantaneously turned on its head.

As should your approach. Do not be afraid to admit errors. I remember that I regularly initially sought to lock in a profit (usual approach) and then ended up reversing that into an alternate position when events suggested that, although I lost a couple of ticks, I should reverse (political approach). This is obviously easier in high liquidity markets but the recent volumes traded on politics suggests that this should not be an issue.

However, you can only take that approach if you are fully aware of what the key areas are. Clearly if you are trading the political markets you will have good knowledge, but you can always have more. Say there's a 6% swing in an early declared North East swing this time around. What is the sitting MP's Brexit position? What was their role in the campaign. How are the fringe parties contesting the seat? That's not to say that you need to have a filofax on every constituency and its area, but focus in on areas which you think could be critical. In the US election, the swing states were well known but were the voter precints?

Finally, in all markets there has been a spell where the outright value has been greatest. A few hours in, there is usually sufficient empirical evidence available to strongly indicate what the eventual outcome will be. Use it. I would say that those trading the markets have been spoiled recently as the sheer drift of the overturns has been such that there seems to have been a point in the evening where profit has looked to be secured.

Ironically, despite a tendency to green up myself far too early, this has been where the best value has originated. I seem to recall Leave being 2.0+ at 2 o clock in the morning even when all results were beginning to show a fairly steady swing away from expectations and of the size that would produce a Leave victory. Why did the price take so long to move? Well, I would suggest that was caused by those looking to lock in a profit and the sheer scale of the movement. You cannot sprint a 800m race for instance! However, if you are only doing a 200m race you can speed by and take the baton.

After this, I seem to recall there then being large swings as the markets cotton onto outcome reality and the battle between value and profit looks to reach maximum intensity. At this time if you are confident in your approach, you can look to add to your profit with consistency. These markets are not linear. There will be bumps in the road and if you sit there with a net waiting for one to be hit, you can occasionally collect.

Then, you can sit back. Knowing your pocket has been padded but knowing that the despair you may feel over the upcoming months will not have been truly recompensed by the outcome the public has chosen. But that's another story. For another day. For now, those are my initial reflections on trading political events. The biggest question that now remains is whether a similar reversal will happen this time...

As ever - any feedback is greatly welcomed; especially as I look to get back into blogging and am aware of the need to refine my style. Or, if anyone wishes to discuss the markets themselves further, feel free to message me on Twitter @ TheRealMoaner

Footnote - Main Markets Traded:

Politics / 07 May 2015 General Election : Overall Majority

Politics / 07 May 2015 General Election : Next Government

Politics / EU UK Membership Referendum : EU Referendum - Brexit

Politics / EU UK Membership Referendum : EU Referendum - to Remain Vote Percentage

Politics / 2016 US Presidential Election : Next President

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