The Brexit Short: How Hedge Funds Used Private Polls to Make Millions

Isn't the article's main concern the conflict of interest when polling companies release both public and private polls?

They have an incentive to release inaccurate results to the public in order to benefit their private clients even further.

> Inside YouGov, concerns about the law limited the company's potential offerings, according to an email that YouGov founder Stephan Shakespeare shared with Bloomberg. YouGov’s chief financial officer spoke to lawyers and decided that a single hedge fund could not be considered “a section of the public” but that multiple hedge funds getting the same exit poll might cross the line. Other polling companies appear to have interpreted the law differently.

It's a grey zone whether releasing the private poll data broke the law.

What seems clear is the law hasn't caught up with the technological realities.

Also the other main point of the article was that it is questionable whether it is appropriate to use polling data to influence the markets, like Farage has potentially done.

They claim he knew which way it way going, contrary to public data. It's also clear that he was one of the figureheads of the Leave campaign, and thus his concession would carry weight.

One could see how this might be interpreted as a form of manipulation. It's not claimed in the article, but he could well have talked up Sterling in order to short it at a better level.

The laws also forbid sharing inside information, yet if you have a company conducts its own “research” to discover inside information from others before its published that doesn’t make it legal.

The point of many trading laws is to prevent trading based on non public information. Privately conducted polls on political votes is definately non-public information, and in order for them to trade based on them they should publish first, which would likely also deminish the returns since suddenly they aren’t the only ones aware of the public/poll disconnect.

I guess you mean "fine" as in "legal", not "fine" as in "ethically unobjectionable".

Except the article clearly explains that it was less "hedge funds conduct[ing] their own research independently to have better information" and more hedge funds buying early access to the polls not permitted to be released until 10pm in order to front run people speculating on them, and that doing so was a legal grey area. Sure, the people buying and selling "private" exit polls did so openly with confidence they wouldn't be prosecuted, but that doesn't mean what they were doing ought to have been legal or the original drafters of the law had intended to permit it. The safe profits weren't in trusting the polls were accurate information, but in putting big money on their predictions before most speculators were allowed to see them and taking [most of] it off at a profit when they were revealed on TV. That's really far too basic a strategy to deserve appreciation.

Throw in the article's [much more speculative] suggestions that pollsters' TV statements about the confidence of their results might have been influenced by their paying customers' strategies, and the suggestion Farage "conceded" whilst expecting to win because he wanted to bet against the people who trusted he was making an honest assessment based on good information. Neither would be likely to be illegal - people aren't obliged to be honest on TV and don't have fiduciary duties to holders of sterling - but both would be difficult to call ethical. That said, it's entirely plausible those individuals did honestly believe what they were saying at the time. Everybody expected it to be close, and as the article acknowledges, one of the reliable big pollsters' exit polls gave the wrong result.

By trading on this private information on the public market, one could argue they did indirectly disseminate the information though, which would be explicitly illegal.

Edit: because the direction of the trades would be publicly visible and highly correlated with the poll results.

But surely if it's possible to make £500 million in one day, that's quite a big incentive to artificially 'twang' the markets because hedge funds profit from instability no? If you throw a rock in a pond there are lots of short term fluctuations.

I mean, how expensive was all that Cambridge Analytica stuff in comparison to how much money could be made from this?

>insider trading is (generally) trading on material non-public information

No, this isn't how it's defined in the US. It's completely legal to trade on material non-public information that you collect on your own via research (e.g. satellites looking at retail parking lots).

In the US, it's only illegal if you use information to trade that violates a fiduciary duty (e.g. using non-public information from a CEO).

It's probably more accurate to think of insider trading as being about trading on privileged access to information. Being non-public is more about who could, in principle, get that information rather than it being generally available.

In the Brexit case, there couldn't be an insider issue as the polling companies aren't inside anything relevant.

The grey area here is solely due to the law that says that exit polls can't be made public before the polls close. That is separate from insider laws but does relate to a question about what does "public" mean in that law.

In principle you might fall foul of insider trading if you had privileged information from the BofE, say, that they were going to make an unexpected rate move before it was announced. Similarly, if someone on Theresa May's staff bet against the pound on Sunday night, there may be a case as killing the vote on Monday was sure to trash Sterling.

In the UK, insider trading as a crime is understood to be trading on non public information no matter who you are. IMO it’s a law which only penalizes UK domiciled investors. A foreign hedge fund can make an inside trade on the UK market, in the US say, by dealing off-exchange with a bank-counterparty in the UK and abroad. The bank-counterparty can just unload the other side of the trade with a UK client. The bank-counterparty, with no knowledge of the motivation of the trade, has done nothing wrong. The foreign hedge fund has done nothing wrong. The UK investor is the patsy, fooled into a sense of confidence by a law that can’t be enforced. But all this is moot for currencies because I think they are completely unregulated. FX is where the big sharks hunt.

The UK (and currently EU) law is different. In the EU, even if the party dispensing the material non-public information does so with no benefit or even unknowingly and by accident it is still illegal to trade on that information.

For a more thorough examination, see a recent Matt Levine piece about someone being charged for insider trading after overhearing material non-public information in a public place:

https://www.bloomberg.com/opinion/articles/2018-12-03/inside...

They'd only harm their reputation and ability to gain new clients.

There really is no need either. Early access to poll results and crosstab data excluded from public results is still extremely valuable.

>The problem I see with companies selling private polls, is there's an incentive to release less accurate public polls

Out of genuine curiosity (I'm American and don't know all the workings of UK government), is the public actually paying for these polls (via some agency in charge of that)? If so then yeah, "the public" is a client and if they were getting shorted in favor of private clients against the contract then that'd be a problem.

On the other hand though if polling companies are just doing it as a public service or form of advertisement (aka "see how accurate our public polls are on general elections, you can also expect that kind of rigor if you pay for us to poll about your product") then I'm not sure what the public interest angle is in terms of "less accurate public polls", nor do I see an enforcement angle given that those could just be the normal cheaper ones the company does and it's private entities commissioning and paying for more extensive, expensive and accurate collection. As far as I know polling companies themselves are private entities and are just offering a service. And in practice my understanding is that a lot of "public polling" is specifically being paid for by private entities in the form of newspapers and the like that then release it, because it sells news and in turn the ads attached to them. So same thing, if the news organizations found out they were being screwed they'd sue, and if results are bad enough they won't go with that polling company again, it's a competitive area.

If the public isn't paying though then I don't see what else can be expected?

I think you overstate the demand for poll accuracy. A hedge fund may want predictive accuracy but I still click on the poll that tells me what I want to hear.

As someone who's stared at market news announcements for years, it's not that easy, even with the data. I've never traded on insider info (and neither should you!) but even when I had it, I didn't think it was that obvious which way things would go.

Often the market moves the opposite way of what you'd think, given the news. Any these can be reasonable:

"Rates went up, and that means firms will have a hard time borrowing, which lowers investment spending"

"Rates went up, but the market (risk assets) also went up because it's a sign the economy is healthy"

"Earnings were up, but people were hoping for a surprise"

The other entertaining one is when a CEO gets fired because of bad performance, and the price shoots up. Oh, the ignominy.

The bookies in the UK were predicting a victory for remain at the time.

What's more interesting, though, is that the majority of bets were for leave, but the bigger bets were for remain. The bigger bets tipped the bookies' odds two to one in favour of remain as far as I remember.

Fun fact: In the US, members of congress are legally exempt from insider trading rules!

Borrow shares, sell them, buy them back later (at a lower price, if all goes well), then return them.

Equity example, you borrow shares from your broker, sell them, and later buy them back to return the shares you borrowed. You make money if the price is lower when you cover your short (excluding whatever fees)

Think of short as a negative share position. To close it out, buy the shares in the market at the (hopefully lower) price. You've (1) sold at a higher price and (2) bot at a lower price - profit is the difference.

Mechanically, the negative share position is achieved by borrowing shares to sell. This carries an obligation to give 'back' the borrowed shares, which is satisfied when you buy in the market.

Borrow a stock worth $100, sell it, collect $100 cash.

Buy stock back at a later date for $50 (You thought the price was going to go down right?), give it back to the original lender.

You have now made $50.

This is my (basic/primitive) understanding of shorting

I wondered this after watching The Big Short. Here's how I understand it:

- Alice estimates that the price of Asset is going to drop from $200 to $100 in one week

- Alice borrows some quantity of Asset from Bob

- Alice sells Asset to Charlie at $190

- After one week, Alice buys Asset from Dave at $100 and returns it to Bob

you borrow the stock, sell it, then buy it back when (hopefully) the price went down and return it to the borrower. You pocket the difference minus a borrowing fee.

Shorting major currencies is easier than shorting stocks. It's done fairly easily on the futures market, where you create a contract (effectively with the exchange) that says you agree to deliver a certain number of pounds at a predetermined point in the future in exchange for a certain number of dollars today. If the pound falls relative to the dollar, you make a profit.

The idea is that you sell stock you don't have, buying them back later, hopefully at a lower price in order to make profit.

The tricky part, at least for me, is how it works in practice. You can't own a negative number of stocks, it means that what you are selling doesn't come from nowhere, and because it is finance, the people who make the short possible have to work for personal gain.

The key here is that there are 3 actors:

A a buyer. Nothing special about him: he buys the stock, and sell it at a later date. He expects the value to go up and make a profit by selling at a higher price.

B is a shorter, he borrows stock (with interest) and sell them to A and buy them back at a later date to repay his debt. If the price went down he will buy back for cheaper than he initially payed, making a profit.

C is a lender, he owns stock and lends them to B. He makes profit on interest rates.

So the stocks go C -> B -> A -> B -> C and it all cancels out in the end. As for cash, C always wins, just like the house in a poker game, while the evolution of the stock determines how money changes hand between A and B.

In reality there are more than 3 actors, and there are mechanisms in place to limit the risk of bankruptcy, but that's the general idea.

With currencies there are no shares so the mechanics are quite different. Currencies come in pairs so you don't just short the pound, instead you bet that the euro will increase in value relative to the pound. So in this case you are long the euro and short the pound.

https://en.wikipedia.org/wiki/Currency_pair

A timely video from Barrons:

https://twitter.com/barronsonline/status/1070391112475557889

If I remember correctly the odds of brexit where like 48% but the pound was valued for 100% chance of bremain. Don't need to be an hedge fund to see there was a limited risk but big potential gain for this trade.

It’s an old story, from 6 months ago, which has been pretty well corroborated by many other news channels since then. It’s good to be skeptical, but this one is spot-on.

If the Supermicro story is the only example where Bloomberg has been inaccurate then it still has a far, far better track record than any other press outlet on Earth.

Why the downvote? Isn't this comment bringing good critic?

The polls were not that bad: https://fivethirtyeight.com/features/the-polls-are-all-right.... It's just that the outcome of US presidential elections can be changed by relatively small shifts in a handful of swing states.

True, although exit polls such as here probably can be more reliable than asking days beforehand, especially to capture voter turnout.

Fair point - the Ashcroft polls, funded by the UK's Conservative party, called the 2015 election as a tie, although it turned out to be a major victory by the Conservatives.

https://en.wikipedia.org/wiki/2015_United_Kingdom_general_el...

Maybe the polls were bad because the people conducting them were pushing to have sufficient difference between private and public polls in order to maximize their profits.

Except for the one poll that was accurate, but everyone was giving it shit because it was giving a result they didn't want to hear.

http://graphics.latimes.com/usc-presidential-poll-dashboard/