Business

London's City braces for historic day

Trader watches multiple screens Image copyright Getty Images

It's tricky to find a hotel room for Thursday in the City of London or Canary Wharf. Financial institutions have bagged them to accommodate the extra staff needed for this unique night.

City of London dealing rooms will be alight on referendum night as firms brace for what could be the most dramatic trading day since Lehman Brothers collapsed in 2009.

The UK's biggest fund supermarket, Hargreaves Lansdown, has tripled its dealing staff, hired more staff for its helpdesk and extended opening hours to help clients to navigate the aftermath of Thursday's referendum.

Others are beefing up their staff levels, with many replacing normal skeleton night staff numbers with the full daily complement.

Gyrations

There have been plenty of other standout days for the pound, caused by shocks to the financial system over the years.

There was the day in 1992 when sterling was forced out of the Exchange Rate Mechanism. And whole weeks of gyrations during the credit and eurozone crises.

But no date has been signalled so clearly for so long.

"There are very few precedents for such a big event in the markets," Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets said. "We've been scrabbling around for parallels - but there are none."


Top four sterling moves post World War II

Image copyright Getty Images
  • 1971 Pound moves 3.4% after Nixon Shock -- cancellation of the direct international convertibility of the United States dollar to gold.
  • 1 November 1978 4.31% "Winter of discontent" shakes global investors confidence in UK's economy.
  • 16 September 1992 4.29% when the UK exited the exchange rate mechanism.
  • 20 Jan 2009 - Pound slides 3.9% at the peak of the financial crisis following the demise of Lehman Brothers.

Source Bank of New York Mellon


Skittish

A casual observer would be forgiven for thinking that the currency markets have been frenetically busy over the past month, but that's been caused by lack of dealing action, something that tends to exacerbate movements.

Over the last two weeks, traders have been anxious about what is fair value for the pound, keeping trade volumes in the currency around 25% lower than normal.

Mr Stretch said: "There has been a dearth of liquidity [dealing volume] and moves have been skittish and volatility has been at extreme levels in the last few weeks."

If a clear result comes in, it could open the floodgates and liquidity could surge.

That may not immediately be apparent. Major investment banks have warned clients that liquidity, or their ability to carry out a buy or sell an order could be limited - because everyone will be trying pile in at the same time.

Image copyright CARL DE SOUZA
Image caption The Bank of England has measures in place to ensure smooth markets

Intense

The Bank of England is watching. It said in the minutes of its most recent monetary policy meeting that it would carry out more intensive supervision than typical.

"The central bank's Prudential Regulation Authority of major financial institutions [will] ensure they had sufficient liquidity, including in foreign currencies," the minutes said.

Trade in the pound typically makes up roughly 15% of the world's $5 trillion per day currency market, making it the fourth most actively traded currency.

Trade restricted

But some smaller players - those who deal in smaller, often personal, trades- will have a far quieter referendum results night.

They have stopped dealing altogether, as the uncertainty is too much.

Some firms that specialise in overseas remittances is restricting trade ahead of the vote, with transfers from other countries into sterling from other countries suspended on Thursday at 07:00 BST until the results are announced on Friday morning.

And the heightened awareness of currency swings prompted by the referendum has even flushed out an army of amateur speculators.

At the Post Office, currency sales are 36% higher this June than last, with online dealers' trades soaring 154% compared with last year.

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