As the 2024 US presidential election approaches, the market is bracing for extreme volatility, which could present significant challenges for brokers, particularly in terms of liquidity management.
The 2024 US Election: How Volatility Impacts Liquidity
“Liquidity issues tend to arise during news events that trigger unexpected volatility,” said Jonathan Brewer, Chief Revenue Officer at GCEX, when discussing with Finance Magnates the possible impact of the upcoming US elections on the brokerage business. “This particular election could result in extreme volatility, which may lead to liquidity challenges for brokers who have not carefully curated their liquidity.”
Jonathan Brewer, Chief Revenue Officer, GCEX
“Poor liquidity management could result in price spikes, outages, and even, in extreme cases, erroneous liquidations of client positions.”
Trump vs Harris: Market Expectations and Volatility
The US Presidential election is scheduled for 5 November 2024, which is less than three weeks away. However, unlike previous elections, the race between former President Donald Trump and current Vice President Kamala Harris is extremely close. Such uncertainty often leads to unexpected market movements. Interestingly, recent betting market odds show that Trump is leading by double digits.
Trump's odds continue to rise.He's now 24% ahead with 15 days to go.— Polymarket (@Polymarket) October 21, 2024
“Trump is seen as more ‘market-friendly’ than Harris,” said David Morrison, Senior Market Analyst at Trade Nation. “Investors feel he understands business and has consistently supported low taxes and low interest rates. If he were to win, the dollar might drop, while precious metals and equities could rise, at least initially.”
David Morrison, Senior Market Analyst at Trade Nation
However, if Harris wins the election, Morrison believes “there may be some initial disappointment among investors that Trump didn’t win,” adding that in this scenario, “the dollar could strengthen, while equity markets might see a temporary sell-off.”
Ernest Yiu, VP of Marketing at Ultima Markets
On the other hand, Ultima Markets' VP of Marketing, Ernest Yiu, thinks that “a Harris victory could signal a shift towards more progressive policies, potentially leading to increased regulation and higher corporate taxes, while a Trump victory could heighten geopolitical tensions, similar to his previous trade war with China.”
Expert Opinions on Liquidity Challenges for Brokers
Despite the close competition, the market is expected to react sharply, whichever side wins the election. The US election is one of the most impactful global market events due to the size of the country’s economy and its worldwide influence.
Chantelle Lea, Regional Marketing Director at ThinkMarkets
Chantelle Lea, Regional Director of Marketing at ThinkMarkets, expects “market volatility to decrease just before the vote, followed by a surge once the exit polls are released.” According to her, “The key will be to watch the exit polls in swing states, as they will have the most impact on the election result.”
Tickmill’s Managing Principal, Joseph Dahrieh, noted that “Historically, markets tend to rally after elections as uncertainty fades and new policies are anticipated.” Tickmill has even launched a hub for traders to track US election-specific market volatility, providing data, expert analysis, and historical insights.
Several other brokers have also enhanced their market analysis tools for traders, anticipating a surge in trading activity around the US elections.
This will annoy all those people who are adamant that TA is not relevant to the $VIX — Chris Beauchamp (@ChrisB_IG) October 16, 2024
Joseph Dahrieh, the Managing Director at Tickmill
“Volatility related to large events like elections tends to increase trade volumes, which benefits brokers through commission and spreads,” said Ultima Markets’ Yiu. Trade Nation’s Morrison agreed to this notion and added that “Brokers favour higher volatility because it typically leads to active markets, providing plenty of trading opportunities for their clients. Some brokers widen their spreads when volatility rises.”
Despite these advantages to brokers, GCEX’s Brewer said: “Retail clients’ trading performance is often inversely related to market volatility.”
“Strong market movements tend to trigger significant liquidations of retail clients, especially those who overuse leverage or take on excessive risk,” he added. “Volatility spikes lead to high trading volumes but also to substantial client losses. This makes volatility beneficial for brokers, whether they operate a risk-based model (B book) or a flow-based model (A book / STP / ECN).”
Strategies Brokers Are Using to Prepare for Volatility
However, volatility also poses risks for brokers who are unprepared. “Extreme volatility is risky for brokers due to increased margin calls, potential slippage, and widened spreads,” Yiu noted. Liquidity is another challenge in volatile markets, as he pointed out: “Liquidity providers may pull back or widen spreads, making it harder to execute trades at desirable prices.”
“The increase in trading activity requires strong relationships with liquidity providers to manage risks effectively,” said Dahrieh. “Brokers must also ensure reliable technology to handle the surge in transactions and avoid operational failures.”
Brokers should work with multiple liquidity providers to prevent disruptions during volatile periods. “It is essential for brokers to use a diverse mix of top-tier liquidity providers,” said Lea. “This ensures consistent pricing, execution, and competitive spreads, even if one or two providers withdraw liquidity.”
Interestingly, some brokers reduce leverage or increase margin requirements during times of thin liquidity to manage risk, Yiu pointed out.
“Brokers approach high-impact events like the US elections by implementing various risk management strategies to handle market volatility, such as setting exposure limits, monitoring market changes in real time, and conducting stress tests to identify weaknesses,” said Dahrieh. “As conditions evolve, they adapt their practices, develop crisis management plans to maintain operations, and ensure adequate liquidity. Brokers also assist traders by improving risk management tools and providing real-time market insights to help them navigate the expected volatility.”
Market Reactions: How Will the Election Influence Trading?
There is no doubt that trading volumes increase during volatile markets. But how do traders behave? How do traders' sentiments change in volatile markets?
Most retail brokers experienced a boom during the volatile period caused by the COVID-19 outbreak in 2020. Trading activity surged, and the revenue of many publicly listed brokers, including IG Group and CMC Markets, peaked during those months.
Although the US election might not have the same impact, it could still significantly influence the market. Data from eToro also revealed that 49 percent retail traders adjusted their portfolios ahead of polls.
“With Trump looking to break the mould, excitement will be high, and we expect a surge in new client sign-ups, deposits, and trading volume,” said ThinkMarkets’ Lea.
However, Yiu noted, “Most traders become more cautious before major events like elections. They tend to reduce exposure, close positions early, or hedge their positions to protect themselves against unexpected outcomes.”
He added that “some traders might act differently, seizing opportunities by trading short-term in the higher volatility, either through scalping or day trading.”
GCEX’s Brewer also pointed out: “EAs, which account for a large percentage of transactions in our market, are likely to trade very actively and, in some cases, erratically.”
Conclusion: Navigating Volatility During the 2024 US Election
With the 2024 US election expected to bring significant market volatility, brokers are taking various steps to prepare. By diversifying liquidity providers, upgrading technology, and improving risk management tools, brokers aim to mitigate the risks of price spikes, outages, and liquidity challenges. While volatility can present trading opportunities, both brokers and traders must be prepared for the potential risks involved.