The UK’s Financial Conduct Authority has issued a warning that trading on unpublished polls ahead of a UK general election or, who knows, another Brexit Referendum, could constitute a breach of its market abuse rules – although given the pollsters’ recent performance around the world one has to question why anyone would bother except as a reverse indicator!
The use of the word “could” by the FCA illustrates the problem faced by anyone trying to monitor and regulate this type of behaviour, however, because exactly where do we draw the line between the intelligent accessing of knowledge and front running?
At face value the issue seems cut and dried, it stems from reports after the 2016 UK vote on EU membership that polling firms were selling their data to hedge funds, who were then trading on it – and as I note, I hope they got out of their long sterling position in time! It is not that easy, however.
This is not the first time that we have had such an issue, in 2013 some of you may remember that there was some noise about the University of Michigan/Thomson Reuters Consumer Confidence Survey which was being sold to private firms who received the data a short time ahead of release. I remember speaking to someone involved in that issue who pointed out that without the private subscribers, the poll would probably not have been done at all – therefore, it begs the question, if a hedge fund with the resources wants to pay for private polling, that is then made public, is this wrong?
I don’t think there are rules around taking a private poll and making it public – information is leaked all the time – so is this just a question of who pays the piper? If a polling firm has a schedule they adhere to and lets certain customers have the data first I consider this unfair, but if those customers are paying for the poll that is then made public…? That’s a little trickier.
The FCA is clearly acting in the belief that polls move markets and to an extent they do – even if they are largely discredited at the moment – so we need to look at why the data is helpful. If it is there for a fund to build a broader overview of the vote should they be punished for that? If it is for insider trading or front running then of course it needs to be stamped out – but where is the line between having a good information source (a correlation perhaps?) and market abuse?
It could be argued that by stating all data should be made available at the same time to everyone, we are being unfair to those traders not at the top of the technology tree, for in those circumstances it becomes a speed game – who can act on the information quickest? As regular readers may know, I do not agree with CFTC commissioner Brian Quintenz who said earlier this year “The goal of financial markets is not to protect or shelter the less informed”, but for a market to thrive there needs to be a balance of fairness that gives everyone a chance.
I have more of a problem turning this issue into a speed game than I do people using the information – at their most comprehensive, opinion polls in elections probably take in less than 0.0001% of the electorate, and as such while there is no guarantee (as proven in most polls since 2016) that the data will accurately predict the outcome, there is a guarantee that those firms that have spent hundreds of millions on microwave towers and the associated paraphernalia will be first to market.
There is also the question of what is termed unstructured data – if firms are accessing satellite images to monitor activity in various fields, should those images be made available to everyone? We will get to the stage where everything has to be published to a schedule in one place and everyone will try to react at the same time and only one or two will get through the door. I don’t consider this a healthy market environment, for that we need a steady stream of structured and unstructured data. If all data is available to every one we will have a market that does not represent a range of views, it will be AI-driven views that will lead to crowded trades and a race to zero in terms of speed.
If that happens, we ignore the basic function of all markets – the servicing of the hedgers – and we may as well turn financial markets into casinos. There are enough people that believe the markets are a great big gambling frenzy, a move to restrict the accessing and publishing of data would most likely result in those charges coming to fruition, and that isn’t healthy for anyone.
The answer is not clear to me, I have to confess, but perhaps there needs to be a public declaration made by trading firms that they are paying for private data from polling firms when it comes to elections? At least then counterparties will have the opportunity to account for this when pricing and managing risk from these counterparts.
Overall though, it is hard not to see this as a non-issue. Over the past three years off the top of my head the polls would have had you long Cable, short USD/MXN, and long Cable again – and you would have been wiped out on every one. So if people want to play the private polling game then go ahead – knock yourself out thrillseekers!