Labour’s deputy leader Tom Watson wants Prime Minister David Cameron to ban hedge funds from running exit polls on 23 June. It’s not because he’s worried they’ll influence the vote. That’s happened in the US before, where exit polls in earlier time zones have apparently affected voter turnout out further west. But Watson has bigger worries. He said in a statement:
Information about a historic vote that will shape the future of our continent should be made available to everyone at the same time, not shared among a privileged few whose only motive is to gain financially by attempting to predict the outcome. I hope the government will put measures in place to prohibit this avaricious plan by financiers to benefit from information that belongs to every voter… In the longer-term, it’s time we took a long, hard look at how the opinion poll industry in the UK, whose findings are often unreliable, impacts on our elections, media coverage and political decision-making.
Boo hoo. What a sook
If hedge funds what to commission exit polls, at their own expense, to take risks with money, at their own expense, about a possible result, why shouldn’t they? It’s a free market, isn’t it?
Watson makes the mistake of confusing information with intelligence. Information is everywhere. And the result of the referendum isn’t really information until it’s a known result. What he’s complaining about is that some people will have better intelligence about the likely outcome of the referendum. And that makes him very angry.
As I said, boo hoo. As he pointed out himself, the polls are often unreliable these days. What people say to a pollster and what they do in the voting booth are increasingly different. Who knows why? But most people tend to tell you what they think you want to hear in order to please you. What they do privately, with their money or their vote, is a different matter.
Besides, the whole story of markets is how people act on the same information or how they try to gain an advantage – any advantage – in turning that information into intelligence. Take the Rothschilds here in London. According to Kyle Caldwell in The Telegraph last year, the family wasn’t always rich. He writes that:
The initial fortune was made in government bonds and bullion but a tidy profit also came Nathan’s way after he spotted an opportunity to make money from the Napoleonic Wars. Nathan opted to support the Duke of Wellington financially and started to loan money to English troops fighting Napoleon. The family netted healthy profits when the debts were repaid.
But they also speculated on the stock market. And here, as the armies closed in for the final confrontation at Waterloo, Nathan’s family connections gave him a crucial advantage. In an age before the instant transmission of information across the world, the Rothschilds had a network of agents across Europe in place to send news of key events such as the battle back to London. On the afternoon of June 18 1815, Nathan learnt of Wellington’s victory.
Realising that other investors remained ignorant of the battle’s outcome, he sold heavily on the stock market. Other traders followed suit. But later the same day, still before other investors had learnt of Wellington’s victory, Nathan quietly bought almost the entire stock market at incredibly low prices. When the news eventually emerged, the market rocketed, netting Nathan a fortune. He is said to have coined the maxim “Buy on the sound of cannons, sell on the sound of trumpets”.
There have always been information asymmetries in the world. Very lucrative ones. The world of modern communication and continuous pricing has given the false belief that everyone knows everything at the same time and everything is perfectly priced. Or, prices always reflect the market value of assets at any given moment.
And the last line is indisputably true. But market value and book value are not always the same. That’s why Warren Buffett has famously said that “Price is what you pay. Value is what you get.” A price is just two people on opposites of the trade agreeing to an exchange. Both parties have different views of the value of the security, or at least different motives for entering the exchange.
In any event, my point is the same: boo hoo.
Watch sterling to tell you whether the UK will leave the EU. If we stay, not much is likely to happen. It’s the status quo. If we leave, a lot will happen. But no one knows exactly what. The best the hedge funds can do is have a little advance knowledge that we’ll leave, and perhaps go big on a fall in the pound.
But everyone already knows that. So already, the information asymmetry is gone. As I said, boo hoo.
Category: Brexit