Will midterm elections spark a boom in overnight trading?
Billionaire investor Carl Icahn famously bragged about his election night trading prowess in 2016 when he stepped away from Donald Trump’s victory party to scoop up temporarily beaten down stocks.
Unsurprisingly, Trump’s stunning victory and the resulting market volatility, which saw S&P 500 futures tumble, briefly triggered market curbs before roaring back, ensured heavy volume in S&P 500 futures overnight. According to CME Group, more than 2.3 million e-mini S&P 500 futures contracts changed hands in overnight trade on election night in 2016, accounting for 44% of total volume on Nov. 8 (see table below). On an average day in 2016, overnight trade accounted for 10% of volume.
Could Tuesday’s closely watched and emotionally charged midterm battle for control of Congress spark a similar surge?
It depends, of course, on the results. But experts aren’t banking on similar volume.
J.J. Kinahan, chief market strategist at TD Ameritrade, told MarketWatch that barring a major upset, markets are likely to take the results in stride Tuesday night and Wednesday morning. Given last week’s volatility around trade-related headlines, Trump’s meeting with China President Xi Jinping later this month is more likely to be a major market mover, he said.
As the table shows, overnight volume in e-mini S&P 500 futures YMZ8, +0.00% in the midterm election in 2014, when Republicans took back control of the Senate and held the House, wasn’t out of the ordinary as a share of overall trade. The same was largely true in the 2012 presidential election when Barack Obama, as expected, held off Republican challenger Mitt Romney, while the 2010 midterms saw overnight activity make up a smaller-than-usual chunk of overall trade.
Widening the lens, however, shows that overnight volume for all CME futures and options, including equities, fixed-income and currencies, has tended to run above average on recent election nights (see table below).
While U.S. citizens are obviously focused on the election, the results tend to come in “right in the middle of the day for Asia and early morning for Europe,” Kinahan noted, spurring natural demand from institutional traders. On the retail side, more trader-oriented types both on the domestic and international front can find opportunities in any overnight volatility.
And when politics create volatility, those traders do show up, Kinahan said. He said the top trading day of the year for retail clients at TD Ameritrade was after the U.K. voted to leave the European Union in the June 2016, in that key Brexit referendum. The 2016 presidential election saw Nov. 8 rack up the heaviest futures trading volume of the year at the firm, followed by heady volume on Nov. 9.
TD Ameritrade’s decision to introduce 24-hour trading in several popular exchange-traded funds was driven in part by client demand following the 2016 election, Kinahan said.
Stocks are coming off a volatile October that saw a widespread selloff that sent the Nasdaq Composite COMP, +0.56% into correction territory as formerly highflying tech stocks headed south, while the S&P 500 SPX, +0.36% and Dow Jones Industrial Average DJIA, +0.34% turned in their worst monthly performances in years.
Polls indicate the midterms are likely to see Democrats wrest control of the House from Republicans, who are expected to retain control of the Senate. As results come in, investors might react to any sign Democrats are on track to take control of both chambers or that Republicans are in line to retain control of both.
John Brady, managing director of institutional sales at futures broker R.J. O’Brien & Associates, isn’t anticipating much additional volume during Asian hours but said activity could pick up during European hours depending on results. In particular, he argued that any sign that Democratic Sen. Robert Menendez is in danger of losing his seat to Republican challenger Bob Hugin could provide an early spark for bets of a better-than-expected Republican showing.
Election-night activity tends to be overwhelmingly institutional, he said, but volume Tuesday night and Wednesday morning isn’t expected to be overwhelming. Brady said the firm increases overnight staffing on election nights during presidential election years but not in midterm years.
If the GOP does manage to hold both the House and Senate, a “risk-on” trade would likely ensue, Brady said, but could be cut short by a rise in interest rates on ideas Trump and his Republican allies would move to further loosen fiscal policy and give the Federal Reserve impetus to remain aggressive in raising rates.
If Democrats do as well or better than expected, that could also be a positive for stocks on the notion that gridlock won’t lead to a reversal of policies that have been credited with lifting stocks, while a lack of additional fiscal stimulus could spark gains for bonds, pulling down Treasury yields, he said.
Meanwhile, most individual investors should probably look past the elections toward their longer term goals, cautioned Justin Waring, a strategist at UBS Global Wealth Management, in a Monday note.
“Data shows that political outcomes can skew economic confidence. And some investors’ political fears overshadow their investment decisions, to often disastrous results,” he wrote. “Learning from their mistake, we have one recommendation: express your political views with a vote, not with a trade.”
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