Bank-sponsored opinion polls: welcome addition, or insider trading?

. Sep 12, 2018
banks polls insider trading Polls have been commissioned by investment banks

Making predictions about Brazilian politics is a thankless and often useless task. After the endless unforeseen twists and turns of the 2013 street protests, 2014 election, and Congress’s impeachment of Dilma Rousseff, many commentators have rightly adopted a strict ‘wait and see’ attitude with regards to future events. The only forecasters which have remained credible over these turbulent years are the country’s two leading pollsters: Datafolha and Ibope.

With election season in full swing and the country heading to the polls in less than a month, opinion polls have once again taken center stage in the political debate. The big two of Datafolha and Ibope have proven their consistency and ability to successfully map voting trends, but in this election there are new players on the polling scene, namely investment banks and other financial agents, who have begun commissioning and publishing their own opinion polls.

While newsworthy, these investment bank polls have not won over the public for their reliability, first and foremost due to their methodology. While Datafolha and Ibope conduct face-to-face interviews, these other institutes carry out their polls over the phone, often with automated messages and randomized samples. At an investigative journalism conference in São Paulo in June, one of Ibope’s executives complained about this type of research, calling the finished products “surveys, not polls.”

Before the start of the campaign, The Brazilian Report staff writer Diogo Rodriguez explored the phenomenon of telephone polls and whether they can be useful in today’s electoral environment.

However, regardless of whether polls commissioned by investment banks are deemed to be reliable, they do have significant effects on financial markets. A poll commissioned by Brazil’s largest investment bank BTG Pactual, released in the early hours of Monday morning, showed far-right candidate Jair Bolsonaro increasing his vote share to 30 percent and caused São Paulo’s stock exchange to rise, even though Mr. Bolsonaro’s growth was not detected by the Datafolha poll published that very evening.

After last month’s polls suggesting comfortable leads for former president Luiz Inácio Lula da Silva (who officially stood down on Tuesday as the candidate of the Workers’ Party), the Brazilian Real consistently lost value, oscillating from USD 3.70 at the beginning of August, to USD 4.15 by August 31.

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How polls impact currency trading

With such a volatile currency that is highly sensitive to political trends, there is a lot of money to be made by agents of the financial markets.

“Suppose a certain candidate is seen as being less favorable to foreign capital, his election would see investors take money out of the country, foreseeing a worse return on their investment,” explains Filipe Campante, associate professor of economics at Johns Hopkins University, in an email to The Brazilian Report. “This creates a larger demand for dollars, and subsequently raises the price of the currency.

“If an opinion poll is released showing this candidate having a higher chance of winning, agents naturally assign a higher probability of the dollar rising in the future, in so much that it then makes sense to buy dollars now while the price is relatively cheap – which causes immediate price rises.”

Camila de Caso, an economist from Pontifical Catholic University of São Paulo, explains that a significant portion of the market works solely with currency volatility. “Let’s imagine that the dollar rises from BRL 4.00 to BRL 4.05: it appears to be an increase of only 5 cents, but the financial operations involved in this are in the millions,” she told The Brazilian Report. “It’s also worth remembering that the bigger the financial institution, the bigger its chances are of profiting off the volatility of assets.”

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A conflict of interests?

The practice of currency trading off the back of electoral opinion polls is nothing new. However, there is a growing discussion over whether there is a conflict of interest in financial agents commissioning and publishing their own polls, which will inevitably affect the markets. “The incentives [for financial agents] are certainly problematic,” says Mr. Campante. “If a bank has access to the results of a poll before it is published, it could take certain positions which would generate returns as soon as the results are released.”

When asked about whether financial agents publishing opinion polls which will inevitably affect the market could constitute a conflict of interest, economist Juan Jensen, of consultancy firm 4E Consultoria and a member of the advisory board of the Brazilian Development Bank, told The Brazilian Report: “This is precisely why they commission these polls, to have this information before anyone else and to decipher trends of larger opinion polls, commissioned by the media [in this case, Datafolha and Ibope].”

“By disclosing their own polls, providing they have credibility, banks and brokerage firms are able to anticipate the movements of the market.”

Insider trading in Brazil goes by the name of “unlawful use of privileged information” and is a crime, being defined by Article 27-D of Law No. 6,385 as “the use of relevant information, not yet disclosed to the market, which is capable of providing (…) unlawful benefits, by way of negotiating securities.” It holds a penalty of one to five years’ imprisonment.

“They are receiving privileged information,” says Mr. Jensen. “But it’s legal, in the sense that any person or company is allowed to commission its own opinion poll.”

“[Commissioning opinion polls] is expensive, but the banks believe it to be a worthwhile expense, especially when you have a very contested election with candidates who defend very different economic proposals,” added Mr. Jensen. According to an article published in Veja magazine in February of this year, hiring a nationwide opinion poll can cost between BRL 183,000 and BRL 398,000.

Another peculiarity about these opinion polls is in the time of their publication, often one day before Datafolha or Ibope release their own nationwide results. Furthermore, while Brazil’s leading pollsters publish their figures in the evening, once the markets have closed, opinion polls commissioned by financial agents tend to be made public in the early hours of the morning, at the opening of the markets.

According to Ms. De Caso, there is a clear intention on behalf of financial agents in disclosing their opinion polls as the markets open. “The largest gains on the financial market don’t come from the level at which a certain asset is situated, rather from how much it rose or fell to reach that level,” she explains. Publishing polls once the market has closed minimizes the risk of excessive volatility the following morning, therefore reducing the potential for profit on behalf of financial agents.

Euan Marshall

Originally from Scotland, Euan Marshall is a journalist who ditched his kilt and bagpipes for a caipirinha and a football in 2011, when he traded Glasgow for São Paulo. Specializing in Brazilian soccer, politics and the connection between the two, he authored a comprehensive history of Brazilian soccer entitled “A to Zico: An Alphabet of Brazilian Football.”

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