Jittery Wall Street banks 'war game' the election with drills, client
calls, special pollsters
Send a link to a friend
[October 31, 2020] By
Matt Scuffham and Sumeet Chatterjee
NEW YORK/HONG KONG (Reuters) - Large Wall
Street banks have been running "war game" drills in their trading
businesses and preparing clients for unexpected scenarios around the
U.S. election next week, hoping to avoid liquidity crunches or technical
errors as markets react to news of who will be running the White House
and Congress, industry sources said.
There is more confidence now than a few weeks ago that there will be a
clear presidential winner, because Democrat Joe Biden has moved up in
polls against incumbent Republican President Donald Trump. However, the
two men are tied in some key states, according to the latest Reuters/Ipsos
poll, suggesting it may not be a slam dunk.
Traders, bankers and wary fund managers told Reuters they are preparing
for a wide range of outcomes.
One bank's equities desk has been running drills across major trading
hubs in New York, London, Paris and Hong Kong for a variety of scenarios
to make sure systems can handle enormous volatility, an executive there
That bank has been reaching out to top customers to get a sense of how
much they expect to trade and ask whether they need margin limits
increased, and to suggest they send orders through approved electronic
systems rather than calling, to avoid inadvertent mistakes, the person
Another global lender hired its own polling firm to check popular
assumptions and prepare for unforeseen possibilities, an executive there
said. The polling firm's work underscored the common assumption that
Biden is likely to win, but the bank is preparing for other scenarios
anyway, said the executive who, like some others, spoke on the condition
of anonymity to discuss non-public internal planning.
Only the most daring investors are going into Nov. 3 with large trading
positions, several sources said. Most do not want to be forced sellers
if they get things wrong. Plus, even those who bet correctly risk the
chance of a drawn-out election battle where markets flip back and forth
for weeks or months.
[to top of second column]
U.S. dollars are counted out by a banker counting currency at a bank
in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking
"I don't think anybody is willing to bet on any particular outcome," said Peter
Kraus, a former executive at Wall Street banks including Goldman Sachs Group Inc
who founded asset management firm Aperture Investors in 2018. "The rational
thing to do is to take your risk down."
If Kraus were running a trading desk at a major bank today, he would tell
traders to take as neutral a position as possible, he said.
"I would much rather be coming into the election with a set of flat positions
and liquidity and, if the worst happened, I would be able to service the trading
volume," he said.
Since banks began preparing for the election, polls and circumstances have
shifted several times – making lenders more jittery about any assumptions, even
days before the event. In late September, bankers told Reuters they were
prepping for a situation with no clear winner.
Volatility has already begun to pick up in equity and currency markets over
rising coronavirus statistics, giving some traders and bankers a queasy feeling
about the days ahead.
Contingency planning around major events is not unusual for major global banks,
which face regulatory stress tests each year to ensure they have enough capital
and liquidity to survive extreme scenarios. Big trading firms conduct similar
trials, as do exchanges that have been planning for soaring volumes and
technical glitches, as Reuters reported on Thursday.
(Reporting by Matt Scuffham in New York and Sumeet Chatterjee in Hong Kong;
Writing by Lauren Tara LaCapra; Editing by Steve Orlofsky)
[© 2020 Thomson Reuters. All rights
Copyright 2020 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.