Exchanges, other trading venues and brokers are preparing for huge volumes and high volatility around the Brexit poll. System capacity has been boosted, unnecessary software changes have been put on ice to ensure maximum reliability, holidays cancelled and, in some cases, trading regulations eased to ensure markets don’t go into meltdown.
Firms are drawing on the lessons learnt in August 2015, when trading surged due to fears of China’s growth, and January 2015, when foreign exchange markets experienced a record day due to policy changes by the Swiss Central Bank.
Many bulked out their capacity after these two spikes, leaving them confident they can handle the high volumes expected after the UK referendum result becomes clear.
Mark Hemsley, chief executive of Bats Europe, the region’s biggest equity exchange by value traded, said its markets had been tested to “handle volumes and message rates multiple times our highest volume day on record, which was 24 August 2015, when we handled €28.3 billion”.
In anticipation of higher volumes, Euronext, the operator of exchanges in France, the Netherlands, Belgium and Portugal, said it was introducing “special measures” for the full week. It said over the period it would declare a “fast market” in its equity options and index options, a measure used in volatile markets that includes relaxing the obligations of market-makers and widening price limits.
Stéphane Boujnah, Euronext’s chief executive, said it had taken “necessary measures to ensure that we will be able to handle the significant increase in trading volumes and high volatility anticipated”.
Alasdair Haynes, the chief executive of UK-based trading venue Aquis Exchange, said it had increased its capacity to prepare for the expected volatility, allowing it to “cope with volumes that are many, many multiples of our highest-ever trading day”.
Rapid advances in trading technology mean that trading venues are now much more robust. Practitioners recall that a surge of trading during the terror attacks in July 2005 caused the London Stock Exchange to slow down, although it stayed trading. However, the LSE has since moved to a new, high-performance trading system called MillenniumIT, across all its markets.
Several exchanges and investment banks have already initiated ‘code freezes’, a practice typically adopted during holiday seasons where technology upgrade projects are put on hold to reduce operational risks, people familiar with the situation said.
Rob Boardman, chief executive for Europe, the Middle East and Africa at agency broker ITG, said it had a “code freeze in place across our European business”, as well as contingency plans for “load shedding”, whereby customers would be turned away if volumes became too excessive.
Societe Generale‘s trading arm sent a note to clients on June 16, seen by Financial News, in which it warned them it “may not be able to provide usual levels of liquidity and pricing in general and on electronic markets in particular”. It said orders could be “filled materially away from requested levels due to potential market dislocation”. A Societe Generale spokeswoman declined to comment further.
A worst-case scenario, according to ITG’s Boardman, was if the final vote was so finely balanced that the result was not known by the time European markets opened at 8.00am on Friday June 24. “There would then be chaos when the result is actually announced,” he said.
Boardman said ITG had already had conversations with clients about increasing their daily order limits, which determine how much they are willing to trade on any single day. “On very high volume days, they need to be adjusted, otherwise clients could be exposed to undue risks, so we are already negotiating extensions to those limits,” Boardman said.
Clearing houses and their members are also preparing for extra calls on margin, the collateral used to back up trades, as well as other measures.
Diana Chan, chief executive of EuroCCP – the region’s largest equity clearing house – said it was always prepared to process higher than normal volumes but added that a vote for Brexit “may lead to markets which will be more volatile than usual”. Chan said the clearer would have additional staff on standby and that its systems had been “tested to deal with twice the maximum peak volume previously experienced”.