As the upcoming U.S. presidential election approaches, traders, bankers, and investors are gearing up for an intense week marked by potential spikes in trading volumes and volatility. From special preparations by Wall Street firms to expected market fluctuations, here’s an overview of what’s happening and what to watch.

Wall Street’s Preparations for Election Night

In anticipation of potential volatility, major banks and financial institutions are taking proactive steps to keep their operations smooth and steady. Some of the significant preparations include:

• Extended Staffing and Logistical Arrangements: Many banks are assigning staggered shifts and even booking downtown hotel rooms to ensure staff are readily available, especially for those who live in the suburbs. This move aims to ensure traders can respond quickly to any overnight market fluctuations as election results roll in.
• Strategic Team Coordination: At Goldman Sachs, Richard Chambers noted that their trading teams would rest earlier in the evening, then return to their desks as polls close to tackle the increased activity expected in the late hours.

Key Markets to Watch on Election Night

Election results often have an immediate impact on bond and currency markets, which continue trading through the night. Here's how the markets may respond:

• Bond and Currency Markets: The focus will initially be on bonds and currencies. The Treasury and currency markets have already shown increased volatility leading up to the election, with the ICE BofA Move index—a measure of U.S. government bond volatility—jumping significantly in October.
• Cryptocurrency Markets: This election also brings the growing cryptocurrency market into play. Unlike traditional markets, crypto trades 24/7, adding a new dimension to election night trading and offering opportunities for investors looking to stay active around the clock.

What Traders Expect from Election Night Volatility

With markets already preparing for potential swings, traders are expecting high volumes of trading. The stock futures may offer a more accurate reflection of market sentiment in the early morning, while S&P 500 options suggest a potential swing of approximately ±2.2%. However, experts like Patrick Murphy from GTS believe the market infrastructure is robust enough to handle any sudden changes without major disruptions.

Some market makers are also reducing their risk exposure to free up liquidity for high-volume trading on election night. Citi’s Vikram Prasad explained that his team has focused on “cleaning up” their inventory to remain as neutral as possible and facilitate client transactions.

Post-Election Market Reactions: What to Expect

The day after the election, stocks will take center stage. The potential for a contested election or a prolonged vote count could keep trading volumes high throughout the week. This uncertainty has led some investors to scale back on high-risk positions, adopting a wait-and-see approach.

• Volatile Market Moves: As polls close, analysts anticipate that initial reactions may be misleading. For example, during the 2016 election, equity markets initially plunged after Donald Trump’s win before rallying the next day. Ed Al-Hussainy of Columbia Threadneedle Investments advises investors to avoid making immediate decisions based on overnight movements.
• Federal Reserve Meeting: Another factor on traders’ radars is the Federal Reserve’s upcoming monetary policy announcement. Scheduled shortly after the election, the Fed is widely expected to cut interest rates again, adding another layer of complexity to an already turbulent week.

Traders Embrace the High-Stakes Environment

Despite the challenges, this election period represents a significant opportunity for traders. High-stakes events like this are precisely what they train for, creating pronounced client activity and a wider range of trading opportunities. According to Goldman’s Chambers, “This is what traders in our seat live for.”

With these preparations in place, Wall Street stands ready to handle whatever election night may bring. Whether you’re a seasoned investor or just following the market's reactions, staying informed and keeping a clear head is essential for navigating the coming days of high-stakes trading and potential volatility.

By preparing ahead of the election, financial institutions aim to minimize disruptions and keep trading efficient and responsive. With added interest in bond, currency, and cryptocurrency markets, this election promises to be a crucial event for both Wall Street and individual investors.

Source: (FT.com/Reuters)