Banks, brokers gird for Brexit-style tumult following Tuesday's election

November 8, 2016 09:32 AM

Big global banks, including Morgan Stanley, JPMorgan Chase & Co and Goldman Sachs Group Inc are bracing for potential tumult on financial markets after Tuesday's U.S. election. As the outcome of the most bitterly fought U.S. presidential elections starts to roll out by Wednesday in Asia, the regional markets will be the first to trade on the results.

As a result, Asia-focused banks HSBC and Japan's Nomura Holdings Ltd are among institutions boosting staff levels, while others are raising the margin requirements for trading to cope with a possible spike in volume or volatility.

Bank preparations ahead of the election reflect their experience following Britain's shock vote to leave the European Union in June, when the S&P 500 fell 3.6 percent the day after the poll.

In the United States, Morgan Stanley told staff to consider using stop-loss orders, an automated trading mechanism that sells an investor's position as soon as a stock hits a preset level, if the result causes trading volumes and volatility to spike.

The bank also told advisers in its wealth management unit to prepare for election-related conversations with clients and pointed them to relevant pieces of research, according to a Nov. 7 memo reviewed by Reuters.


Traders expect U.S. stock prices to swing by about 2% in either direction on Wednesday, the day after the election, based on the price of S&P 500 index options. Options on the PowerShares QQQ Trust Russell 2000 ETF, are pricing similarly large swings before the week is out.

Some banks are projecting a more extreme drop in the event of a victory for Republican Donald Trump, with Citigroup Inc estimating that a Trump victory could trigger a 3 percent to 5 percent sell-off for the S&P 500.

U.S. stocks rose on Monday as Democrat Hillary Clinton’s prospects brightened after the Federal Bureau of Investigation said it would not press criminal charges related to her use of a private email server while secretary of state.

Investors have tended to see Clinton as a more status quo candidate, while Trump's stances on foreign policy, trade and immigration have unnerved the market.

The "market pretty much told you who was going to win today," said one capital markets official at a major bank who was not planning any extraordinary staffing measures.

Another official at a rival bank said Monday's 2.2 percent rally in U.S. stocks had lowered Wall Street's collective angst over the election to DEFCON 4 from DEFCON 2, referring to the U.S. Defense Department's levels of alert.


Brokerage Nomura said in a report on Monday the election was the largest "known unknown" markets have had to contend with since the global financial crisis. It said a Trump victory would likely lead to a more than 6% drop in Asian equities.

The election could result in both higher trading volumes and higher volatility as it's a bigger event for investors in this region than Brexit, said Stephane Loiseau, head of Societe Generale's Asia Pacific cash equities and global execution services.

It plans to increase front office, back office, and technology staff, "ensuring we have a clear escalation system for handling decision-making", and possibly raising risk limits."

Chris Weston, chief markets strategist at IG Markets in Melbourne, said his firm had raised margins on U.S. indices and some dollar trades to 1% from 0.5%, but doesn't expect to see "a massive collapse or spike".

HSBC will bolster staff on trading floors in major hubs including London and Hong Kong to deal with client requests, said a person with direct knowledge of the plan. 

"Around any high profile, potentially market-moving event, it is not unusual for some trading desks to increase staffing levels," said a spokesman for Europe's biggest bank.

No U.S. stock exchange plans extraordinary measures to cope with potential market volatility, exchange officials told Reuters on Monday.

More than half of the stock and bond fund managers polled by Northern Trust in the third quarter said they expected the election to cause a large increase in market volatility.

The extra staffing is similar to what the bank did during Britain's vote to leave the European Union, he said.

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