By Lambert Strether of Corrente
Bloomberg has an entertaining and well-reported story on how hedgies made a packet on the Brexit vote: “Brexit’s Big Short: How Pollsters Helped Hedge Funds Beat the Crash.” I’m going to take it to pieces, and re-arrange it in a new pattern, so you might consider clicking through and reading it in full before going ahead here. So: Here is Bloomberg’s summary of the hedgies’ trade, on the day of the Brexit vote:
Behind the scenes, a small group of people had a secret—and billions of dollars were at stake. Hedge funds aiming to win big from trades that day had hired YouGov and at least five other polling companies, including Farage’s favorite pollster. Their services, on the day and in the days leading up to the vote, varied, but pollsters sold hedge funds critical, advance information, including data that would have been illegal for them to give the public. Some hedge funds gained confidence, through private exit polls, that most Britons had voted to leave the EU, or that the vote was far closer than the public believed—knowledge pollsters provided while voting was still underway and hours ahead of official tallies. These hedge funds were in the perfect position to earn fortunes by short selling the British pound. Others learned the likely outcome of public, potentially market-moving polls before they were published, offering …. Pollsters said they believed Brexit yielded one of the most profitable single days in the history of [the hedge fund] industry. Some hedge funds that hired them cleared in the hundreds of millions of dollars …
Hedgies doing what they do, right? Discovering and exploiting information advantages. No problem here! But there’s… a snag:
Hedge fund managers, of course, try to beat the market by getting the best information they can. For exit polling data, that’s a tricky business. Pollsters have always sold surveys to private clients, but U.K. law restricts them from releasing exit-poll data before voting ends. While some of the practices discovered by Bloomberg fall into a gray area, the law is clear: It would have been a violation if, prior to the polls closing, “any section of the public” had gotten the same data the pollsters sold privately to hedge funds.
But “any section of the public” didn’t get the information, right? Well, that could be the other snag. This brings us to the curious role played by a “section of the public” in the person of UKIP pro-Brexit crusader, smoker/drinker, and shabbily-dressed Nigel Farage. Here’s the what Farage said on the night of the Brexit vote, while counting was still going on:
At 10 p.m. on June 23, 2016, Sky News projected the words “IN OR OUT” across the top of a London building as an orchestral score ratcheted up the tension. …
After the dramatic intro, [veteran anchor Adam] Boulton jumped straight in with a huge exclusive, declaring he had “breaking news.” … [F]aisal Islam, Sky’s political editor,
Just four minutes after the polls had closed, and with meaningful vote counts still more than two hours away, Sky had aired a concession from the world’s most prominent Brexit backer…. In a few hours these “scoops” would prove spectacularly wrong, but in the meantime they spawned worldwide headlines, including from Bloomberg News and virtually everyone else…. The news pushed the U.K.’s currency up—herding investors toward a cliff hours ahead of one of the largest crashes for any major currency since the birth of the modern global financial system. Trillions of dollars in asset values would be wiped off the books, but not just yet.
At 10:52 p.m., the pound rose above $1.50 and reached its highest mark in six months. A few minutes later, Ed Conway, the Sky News economics editor, appeared before a giant screen showing the spike.
(I have elided the role of YouGov, the pollster, because this is a post about Farage.) And here is what Farage knew. Bloomberg:
On June 23, the day of the EU referendum, Farage and his team gathered at the London home of a UKIP adviser. Their actions that day have been retold in two books. The Bad Boys of Brexit is an insider account penned by Arron Banks, a main financier of Farage’s unofficial Leave campaign who was with the UKIP leader that day. The second account is contained in All Out War: The Full Story of How Brexit Sank Britain’s Political Class, by journalist Tim Shipman. It is based on an interview with Chris Bruni-Lowe, who was Farage’s chief political adviser and was with Farage and Banks on June 23.
The published accounts differ, but at roughly 9:40 p.m., which the network then aired within seconds of the polls closing at 10 p.m.
And here is what Farage has to say, now, about what he said and knew then:
Farage called his statement to Sky “a terrible mistake,” but he also asserted that he did not give the network’s reporter a true concession. “It was an acceptance that we might not win, but it was hardly, but it was not how—they [Sky] overegged it. They overegged it. But that’s journalism,” he said.
What Farage could not explain, however, is why he gave a further concession about 70 minutes after the Sky broadcast, which not only echoed the statement aired on Sky, but was more adamant.
A… “mistake” [nods head vigorously]. Here, readers, is where I will remind you that the headline takes the form of a question, and that I’m entering the realm of speculation. I’m also venturing into the world of finance, but Farage’s trade — if trade it be — is so simple that even I can understand it, as we shall see.
When I heard the word “hedgies,” I thought ginormous complexity. For example, this at Refco, where Farage used to work (well before this scandal, I should say at once). The Guardian:
Beginning in the 1990s, Refco extended credit to customers so they could trade in accounts with the brokerage, which dealt in the fixed-income, commodities and foreign exchange markets. When some customers failed to repay the loans, Bennett concealed hundreds of millions in losses from securities regulators and company auditors by shifting them to a third-party company he controlled. He disguised the losses as receivables owed to Refco by Bennett’s company.
Third-party companies! Receivables! My head is spinning!
But on reflection, I don’t think we need to look for complexity at all; we don’t need to make things more complicated than they are. Farage was a commodities broker in the City (“Nigel Farage’s pinstriped image belies modest City career,” Financial Times). Here is what a commodities trader does and how they think:
A commodity trader focuses on investing in physical substances like oil and gold. Most often these traders are dealing in raw materials used at the beginning of the production value chain such as copper for construction or grains for animal feed. These traders take positions based on forecasted economic trends or in the commodity markets. .
In other words, a trade that involves an information advantage (what hedgies look for) is a trade that Farage (as a commodities trader) would have grasped almost instinctively. So from the hedgie’s perspective, Farage’s actions would have looked like this. As an Underpants Gnome:
1) Farage goes on Sky and drives the pound up, by forecasting a win for Remain;
2) He and the hedgies would both have known that in fact Remain is certain to lose, and the hedges will have have shorted the pound, which collapsed when Remain did lose;
(There’s a lot in the Bloomberg story about Farange’s shadowy relations with pollsters, but the above seems the simplest line thorugh the material.) The only question remaining — in our speculation — is how Farange would make his “Profit!!!!!” The natural hypothesis is that Farage would have taken a commission, a finder’s fee, or a cut of some sort, from the hedgies, and would have made sure of collecting it (“a surefire trade”) with his words on Sky. Yves remarks:
10% is not an abnormal number for a hedge fund to pay for a profitable trading idea.
10% of “hundreds of millions of dollars”…. Not too shabby! Perhaps hypotheses like this are what caused the Bloomberg reporters to write:
, a former commodities broker who also went to work for a London currency trading company after he moved into politics. He twice told the world on election night that Leave had likely lost, when he had information suggesting his side had actually won. He also has changed his story about who told him what regarding that very valuable piece of information.
This would be, of course, corruption, and of the rankest sort. Farage would have used his public position as a prominent and authoritative Brexit supporter for private gain. Of course, even as a career commodities trader, he couldn’t possibly have had this scenario in mind the whole time…. That would be too much, right? Further, did Farage, as “any section of the public,” get information from the pollsters? That would be illegal, as well as corrupt. Questions, questions….
 It would be interesting to know if what Bloomberg uncovered is in fact a standard practice for other close elections; for example, the United States in 2016. Exit polling in the United States, though not defunct, has been abandoned by many media outlets. That would not prevent private, no doubt lavishly funded, exit polling. Bloomberg once more: “Capitalizing on a wave of market-moving political volatility stemming from voter discontent across the world, Survation worked for financial services firms in the Italian election in March, when two populist Euroskeptic parties won, according to a knowledgeable source. There could be more to come for the U.K., too, with George Soros, among others, pushing for a new EU referendum.”
 I see why “The Big Short” works as a headline — The Big Short is a gripping, though as Yves says, “wildly misleading” book, and a very entertaining movie — but absent the insane complexity of synthetic CDOs, there’s no Magnetar here; I’m speculating we’re looking at a simple, albeit corrupt, trade, better described as a large short.
 Farange joined Refco in 1995, and left in 2003. Refco filed for Chapter 11 in 2005. From the Financial Times, “How Refco veered from debut to bankruptcy”:
[Refco CEO Phillip] Bennett stated quietly that the $430m stemmed from bad debts run up by Refco customers in the late 1990s and which he had bought from the company. ‘Bennett said he thought the debts had value, so he had purchased them,’ says one of those present. ‘I am not sure anyone believed him.’
At another meeting the following day, Mr Bennett agreed to repay the $430m immediately. But although he raised the funds to do so, it was not enough to save his job or, as it turned out, the company. Ten days later the group had filed for bankruptcy as clients and funders fled. On Thursday, Refco’s futures brokerage was auctioned off and much of the rest of the group, including its prime brokerage, is expected to be liquidated. Investors face losses of more than $3bn and some clients fear they will not get all their money back.
More complexity! It might be interesting to know how those debts were run up, but not relevant to this post.
“Nigel Farage took no position, and had no financial interest in currency movements on the night of Brexit.”
What a nice lawery way of avoiding to say if he was paid beforehand to comment the right way…
> “on the night of Brexit”
That’s pretty good, too.
His wife however….
The vote was:
1. Very close, 51% in favor of Brexit
2. Expected to be a majority to Bremain.
But Farage and crew had hard exit poll data. And Farage was on Sky News talkig the pound down.
52% in favor of Brexit. Day before, my buddies who are finance types and pride themselves on being able to read the tea leaves (and one is a diplomat who speaks 7 languages, another was educated in the UK and has a British wife) thought Remain would win by 6-7&.
I believe I wrote that (off by 1%) too.
The Brexit majority was a surprise.
My recollection was that most thought remain would win by 4 points. So to lose by 4 is a huge swing.
At first i sort of pooh pooh’d this story. But Lambert has made a rather convincing case. No respectable hedge fund (oxymoron alert) would touch this scheme. But i can imagine “unrespectable” ones having a go. Indeed you might just trade favours. When its too dangerous to get paid for information one would just give it to someone else to monetise. No finger prints no tears.
Yeah, a friend who worked at a large London outfit with lots of algorithmic trading said he had to convince people to stay late in the office to react on the offchance remain didn’t win…
Widely speaking, I think this was as much of a surprise as trump beating Hillary (remember that NYT probability needle moving on the night from like 90% certainty clinton would win).
My default reaction to the idea that Farage was party to an elaborate hedge is ‘these people aren’t that smart’ but.. interesting idea.
I don’t think Farange has to be smart. The question is: Does the Brexit trade mesh with his habits of thought as a commodities trader? I think it does.
“UKIP anti-Brexit crusader, smoker/drinker, and shabbily-dressed Nigel Farage”.
Lambert, surely you mean pro-Brexit?
Thanks for the close read. Fixed.
this sounds an awful lot like the climax of “Trading Places”, lol
“After calculating the estimates from various orange-producing states, we have concluded the following. The cold winter has apparently not affected the orange harvest.”
Apologies if this is a dumb question, but why do hedgies not count as a section of the public? I mean I know they consider themselves a cut above, but I’m pretty sure that’s not the legal view…
It was privately sold to them (legal) and not released to the general public (illegal). The gray area would be releasing it to Farage.
I actually think the polling angle is the bigger story here (although that might be my biases at work). I could have made an educated guess that polling firms did work for private clients for higher fees, but I would never have imagined that they might leak the results of a referendum poll early to the private sector for a fee. Who cares whether or not it’s technically legal? If it would have been against the law to make it available to a member of the public, then sharing it with a hedge fund is even worse. It doesn’t even begin to pass the smell test.
Why would anyone ever take a call from a polling firm again if this is what they are doing with your data? I already hang up on most of them, but I make an exception for the ones that are working for non-profit or government clients if I think the question they are trying to answer is worthwhile. If the unspoken caveat is that they’re running a side hustle by selling early access to public sector data for hedgies, then they can take a hike as well. If others take the same view, then the accuracy and reliability of all public surveying will suffer.
> I could have made an educated guess that polling firms did work for private clients for higher fees, but I would never have imagined that they might leak the results of a referendum poll early to the private sector for a fee.
That may ultimately prove to be true (and we certainly are learning a lot about the soft underbelly of electoral politics in the Five Eyes). However, Farage is an enormous target and deservedly so. Stories with villains are easier to tell and more likely to propagate. I doubt we have seen the last of this.
The people I know in the UK say they will generally lie to a pollster, They believe being polled is intruding and rude.
I do not know how widespread is the behavior. Nor do I even know if it is true.
Considering the amount of criminality we witnessed in the financial crisis just passed, this almost seems like small potatoes. A truly next level move will not be Putin hacking to swing the election to a favored player, but a hedge fund hacking results to swing a major trade. I suspect they’ll still use Russian hackers to cover their tracks naturally.
Personally I dislike the man and in dealing with him, I would make sure that my hand was on my wallet and my back to a wall. However, (you knew that there was going to be a however) when you read through the article you find that he and colleagues formed a plan of action, made their preparations, executed it while outmaneuvering people like George Soros, and ran off with a boat-load of cash.
Maybe, just maybe, this is the sort of person that should be dealing with Brexit rather than May and her endless kicking-the-can-down-the-road tactics. That only works if you are not in a cul de sac. Britain achieved its past status as an empire through what you could describe as pirate tactics so perhaps this is what is needed to work through Brexit negotiations and it may be that you need a Farage to do it with- unfortunately.
farage, like putin, makes sense when he speaks. juncker, merkel, may, macron, trump, obama, bush et al. are generally incoherent. farage and putin actually provide lucid responses to off-the-cuff questions.
i don’t get the ad-hominem attack here (smoker, drinker, shabby dresser). if he’s such a bad guy, put that info forward rather than calling him names.
is farage wrong to call out the e.u. as an un-democratic failure which had led to the suffering of millions? (but at least the apples are perfectly round).
Oh I quite agree that whether he is a smoker, drinker and how he dresses is totally irrelevant and has nothing to do with the point being talked about. It drives me to distraction as well to hear our politicians talk in sound bytes and I miss hearing someone talking in clear long sentences like I have heard Farage talk. And he does make good points in arguments and I have pointed out that his actions were quite measured. Just because a person talks sense does not however mean that you have to trust them and I suspect that someone like Farage would always put his own interests first and foremost.
I believe that this segment on the BBC is his second statement that he made in front of the cameras.
I remember seeing it and thinking that his message and tone were quite different that the earlier statement read on Sky.
If he’s talking the market, I don’t see it. He looks to be thinking of his political future and maybe setting up a challenge to a ‘remain’ vote.
Note that Dimbleby claims that Farage blames his “friends in the financial district” for his earlier statement.