Traders prepare for a long, volatile election night

For the big money on Wall Street, there's the prep that's bound to come with a coin-toss election that could dramatically swing policy. Trading desks staffed through the night, with teams in Hong Kong and Singapore enlisted to help. Tracking popular "Trump trades" — long the dollar, short bonds — ready to pile in or quickly unwind.

And then there are the steps taken for an election season like no other. One London-based hedge fund primed its "shock" computer model especially for this moment. Banks are preparing for the risks, however remote, of civic violence — a prospect that would shake the US, the world and global financial markets.

"November 5 is going to be a blindfolded mud-wrestle in a minefield," says Calvin Yeoh, a portfolio manager at Blue Edge Advisors in Singapore. "The election is so tight and path-dependent that it makes it very difficult to trade."

JPMorgan Chase & Co. plans to increase staffing in Europe and Asia to handle overnight volume and volatility; Goldman Sachs Group Inc. expects to have hundreds from its sales and trading teams on-site in New York well into the night, with more ready to log on from home. Across the industry, US employees are gearing up for all-nighters.

"We will stay as long as we need — if that's 2 a.m., it's 2 a.m. If we have to sleep over, which we haven't yet done on an election night, we will," said Glen Capelo, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mischler Financial Group. "We do think there's a lot that could happen."

As Kamala Harris and Donald Trump make their final case to voters, the finance industry is gaming out the implications of a historically close race in a polarized moment. Right now, the markets say Trump will win. Stocks are up, as is the dollar and crypto. Bond yields have climbed. If Harris ends up victorious, popular Trump trades could be rapidly reversed, creating big market gyrations overnight.

Equity options volatility has been climbing in recent weeks even as the stock market was relatively calm, a sign that investors are putting on hedges to protect against post-election swings.

Whoever prevails will inherit what today appears to be a surprisingly resilient US economy. Economists say the plans Trump has proposed, notably, tax cuts and import tariffs, would do more to increase the national debt and inflation than Harris's program. Whoever wins the Oval Office, the next administration will touch virtually every industry and investment.

Right now, though, Wall Street, like much of the rest of the country, simply wants to make it through next Tuesday. New York City hedge fund managers are particularly concerned, said Marko Papic, chief geopolitical strategist at BCA Research. "I'm trying to talk about stock or bond trades, and the chief investment officer wants to know if I think civil war can happen in America," he said.

Swing state polls have rarely been this tight so close to the vote. But even if Trump wins, traders are underestimating the potential impact of hours and days of delayed or contested results, said Marc Sumerlin, founder of Evenflow Macro, who worked on economic policy in the George W. Bush administration.

"I don't think investors are bracing much for Election Day volatility outside of what's normal because the mood has shifted from not knowing who will win to seeing a favorite now: Trump," he said. "People are putting that on, instead of hedging election uncertainty."

Barring an unambiguous, decisive victory at the polls on Tuesday, traders will turn to incremental reporting through the night. Early results from Michigan, which adopted new rules to speed up the counting of absentee ballots, could indicate the trajectory for Pennsylvania and Wisconsin, which begin processing mail-in votes later.

Of course, the potential for legal challenges from either side can complicate the calculus. Scott Bessent, a hedge fund manager and economic advisor to Trump, bought stocks during the overnight swings in 2016, correctly figuring that the outcome didn't merit the market panic. "But I would have bought twice as much if Hillary Clinton had come out and conceded, instead of sending [campaign chairman] John Podesta," he said. "I was watching that and thinking, holy crap, we're gonna have Bush-Gore again."

Many traders were scarred by the 2016 election, when polls favored Hillary Clinton and few had even considered what a Trump victory would bring. As the results became clear, US futures crashed, then recovered. The next two days were the most active in US stock markets for the second half of that year. In 2020, the race wasn't officially called for Joe Biden until four days after the polls closed; when the results were known, trading volume hit a six-month high.

The longer it takes to declare a winner, the harder it is for traders to assess what's driving market moves — especially this time, with the Federal Reserve's next interest rate decision coming two days after the polls close.

Mark Dowding, CIO at RBC BlueBay Asset Management in London, said that after talking to depressed Democrats and exuberant Republicans on a recent visit to the US, he now puts the odds of a Trump victory at 70%. Dowding said he'll be in the US on Election Night to "be close to what is happening on the ground," and the next morning, he expects currency markets will react to new expectations for tariffs, trade and foreign policy.

At the biggest firms, executives say they expect election-related trading to increase as the vote gets closer. At least one major investment bank is halting technology updates in the surrounding days to avoid any outages during crucial trading hours. Retail banks, particularly those with lots of branches, say they are keeping a close eye on potential violence in cities, notably in swing states where results might be contested, and the results not known for days or weeks. In the event of long-lasting protests, they could close branches or have employees work from home.

London-based hedge fund Fulcrum Asset Management has tried to account for the political effects, using months of data from betting markets and political polling for its "shock model" to assess how different asset classes will move as the outcome of the vote becomes clearer.

The UK team doesn't usually trade overnight, but this year, a few portfolio managers and a trader will stay up to watch for anything really unexpected. Suhail Shaikh, chief investment officer at Fulcrum, said he plans to be in the office and awake until 6 a.m. (1 a.m. ET), looking at how currencies are moving compared with rates — and checking in with his wife, who is American and will also be up, or catnapping on the couch in his office.

Lights are likely to be on all night at the US Treasury, said John Fagan, who ran the agency's team tasked with monitoring markets from 2014 to 2018. Volatility is normal — Asian markets sometimes misread the nuances of a US election, said Fagan, now a principal at Markets Policy Partners. But if bonds or the dollar swing widely, the market room leader might call on Treasury Secretary Janet Yellen to make a pronouncement to calm markets.

Some traders say it's more important to know what happens in Congress than who wins the presidency. In recent meetings with clients in Miami, Sao Paulo and Rio de Janeiro, Dave Silber, head of institutional equity derivatives at Citadel Securities, said the number one topic was "the edge case of a sweep."

If the Republicans take control of the House and the Senate, it could lead to higher inflation and a steeper tumble in the bond markets. A divided legislature often translates to calmer markets, strategists and traders say, because it limits the potential for big policy changes.

While Nov. 5 in Australia means tuning into horseracing's Melbourne Cup, for Kellie Wood, a Sydney-based money manager at Schroders Plc, it means being glued to her screens for another reason. She's betting on higher expectations for inflation and hedging possible immigration curbs and new tariffs under Trump, and buying protection on investment grade and high-yield bonds in the event of a Harris win, "since tax hikes on corporate America and high income earners are likely to be bad for equities and credit," she said.

Many investors seem excited to fuel up on caffeine and carbohydrates — "There's no keto on Election Night," one trader said of the low-carb diet — whether they buy, sell or just watch. "It will be really hard to sleep that night given something so significant is happening," said Fulcrum's Shaikh. "Even if you don't trade during this time you learn a lot about markets living through these events."

Disclaimer: This article first appeared on Bloomberg and is published by a special syndication arrangement.