"Black Wednesday" Memories Haunt Traders Ahead Of Thursday's Referendum

Ahead of Thursday's historic Brexit referendum vote, market jitters are bringing back memories of September 16, 1992, when the UK was forced out of the EU’s exchange-rate mechanism, or ERM, as speculators’ borrowing exhausted the central bank’s resources to keep the pound above its floor.

This is better known as the day George Soros "broke the Bank of England", making over $1.5 bilion profit in the process.  On that day, the U.K. decided to let the pound float freely rather than to suffer the high interest rates needed keep the currency within its limits. As a result the central bank raised its key rate to 12% from 10%, then announced a second increase to 15%. By the evening of that same day, which became known as “Black Wednesday,” the government withdrew from the ERM, a pre-euro system of European exchange-rate integration.

24 years later, traders recall one of the longest days in the history of the currency.

Here, courtesy of Bloomberg and for the benefit of traders who were still in school (or may not have been born), is a recap of how veteran FX traders saw, and reacted to, events on "Black Wednesday" two and a half decades later in what has been dubbed "one of the longest days in the history of sterling." Will Thursday be an even more historic day for FX trading? We will know the answer in just four days...

John Glover, now a Toronto-based managing director at risk- advisory firm Validus Risk Management:

  • “At the time I was running the USD/Deutsche Mark options book for a Canadian bank, but we did run a very large GBP/USD book
  • ‘‘GBP had been the focus in the days leading up to the ERM exit, losing somewhere around 5% of its value in two or three days
  • ‘‘For a day or so, no one could understand what was happening, unless of course you were at a bank where Soros was a client of the gilts desk
  • ‘‘That day, the only GBP flows going through were institutionals that had to get out of longs, and it was pretty much only the BOE that was buying”
  • “Our central bank desk struggled to get through to the bank as the phone lines were jammed. Corporates were sitting on the sidelines
  • ‘‘Our GBP options book made more in two weeks than they ever had in a year”

David Woolcock, now London-based global head of sales and business development at Eurobase:

  • “I was the treasury manager for Credit du Nord in London, managing a dealing room of six people and responsible for a proprietary risk portfolio
  • "It was very hectic in the run-up to the exit, which took place afterhours in London. The morning started with the normal pressure on the weak currencies. However, soon the selling of sterling really ramped up on rumors of heavy sales from a known source
  • "With the money markets barely functioning and wild exchange-rate oscillations still occurring on very wide quotes for nickel and dime amounts, it was an eerie market that was full of ghoulish barrack-room humor! Sterling was trading outside the agreed bands, and the game was up
  • "Brexit is a known unknown and so the markets are probably in ’sell the rumor buy the fact’ mode
    "If the vote if for an exit, the debate about what will actually happen to the government will keep the markets nicely volatile, but given the length of time the whole process would take, things would soon be business as usual”

Peter Frank, now a London-based FX strategist at BBVA:

  • “I was working on a bond-trading desk back then, and it was complete mayhem
  • "I remember everyone just screaming and shouting and running around in panic, with dealers shouting prices down several phones at once
  • "An exit from the EU would be similar because it will be chaotic and markets will trade in a very whippy fashion if the leave campaign wins [but] Brexit would be different because it has been openly discussed for years”
  • “Opinion polls have also been close between ‘remain’ and ‘leave’ on a consistent basis, there has always been a strong possibility of Brexit happening
  • "This is different to the ERM in which there was only ever a hypothetical danger of ERM break-up”

Pierre Lequeux, London-based founder of currency advisory firm Argonautae:

  • “I was working on the quantitative and trading desk of BNP London. This was essentially a prop trading desk, and I had my own risk limit and could trade pretty much anything from FX to commodities rates and equity indices
  • "I remember 1992 more vividly. One of the reasons is that it proved to be a one of our best months ever. All our positions in gilts, FTSE, GBP/DEM and other Deutsche mark crosses went our way, I guess because many trends had started way before Sept. 16, when the market really gapped”
  • “1992 was a very different market than what we have today. The speed of access to market and information is way faster. This is a massive differencing factor, and if the market is upset the intraday volatility will be much worse”

Charles-Henri Sabet, London-based chief executive of London Capital Group:

  • “I was trading for my company, TCC Sa. We had an excellent day at the desk. We were all selling GBP/DEM; the only one buyer was BOE, at 2.7860 supporting the floor, then at 6.00 pm they took their bid out and it went down to 2.2000
  • "The FX market was a lot of fun with market makers and risk takers, not like now that FX market is run by geeks
    ‘‘We could see huge spreads in the case of a Brexit because there may be no interest to take risk, but after one hour, we will probably back to reality.”

Thierry Wizman, now a New York-based analyst at Macquarie Group:

  • “I was not trading at the time, but I was working at the Federal Reserve”
  • “My memories have more to do with the notoriety that George Soros gained from breaking the BOE, rather than concern or fear about what this could mean for the global economy. Most people saw this as a good thing for the U.K., since inflation and more competitiveness would come out with being unshackled from ERM
  • "I distinctly recall that while the BOE disdained Soros and other speculators, there were many people in the U.K. who considered him to be a hero at the time”
  • “There are analogies to today. Many people will see the U.K. as being unshackled from Brussels to be a good thing, although the speculators will have much less of a role in bringing this about this time.”
  • “The U.K. tabloids, I suppose, are playing the role of speculators this time around”

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Much more in this BBC special on "Black Wednesday"

Source: Bloomberg