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U.K. Traders May Face ‘Skittish’ Markets on Delayed Vote Count

By Robert Hutton and Kitty Donaldson

Jan. 20 (Bloomberg) -- Adam McCormack worked through election night in 1992, selling U.K. government bonds as markets rallied on an unexpected win by the Conservatives.

For the 49-year-old head of gilt sales at Barclays Capital in London, trading after this year’s election may be little more than guesswork. That’s because the results, typically available by about 3 a.m., may not land until the next afternoon, sending prices swinging on partial tallies as traders bet on the outcome of what may be the closest election in 18 years.

More than a third of U.K. election districts may drop the practice of counting ballots through the night. With opinion polls pointing to the prospect of no one gaining a majority -- resulting in a so-called hung parliament -- the delayed count includes nine seats that David Cameron’sConservatives need to oust Gordon Brown’s Labour Party.

“The market might be tense and skittish,” said McCormack. “You can’t price this in. The difference between the market’s perception of a Conservative victory and a hung parliament could be large.”

The outcome may determine how quickly the government cuts its recordpeacetime budget deficit. The failure of either side to win a majority may lead to a paralyzed government unable to cut spending or raise taxes, risking “a run on sterling,” John White, who runs U.K. equity funds for London-based GLG Partners LP, told reporters yesterday.

The 2010 election date hasn’t been set yet by Brown, who must go to the polls by June 3. Every vote since 1931 has been held on a Thursday. Because local balloting is scheduled for May 6, most analysts and Labour briefing documents point to that as the likely voting day.

Districts Delaying

The need for local governments to save money and new rules were among the reasons prompting 52 districts to delay counting votes until the day after the election, according to an Electoral Commission paper published Jan. 7. Seventeen say they’ll delay if the election is set for May 6. Another 187 say they’re still considering their options.

Among those that won’t count on the night are two seats in Milton Keynes, a city northwest of London, and two in nearby Northampton. The Conservatives need to win all four to control Parliament. Birmingham, central England, has said that if Brown goes for May 6, it won’t count any of its nine seats until the next day. It has three Conservative targets.

The Milton Keynes Council blamed regulations requiring identity checks on postal ballots for the delay. “It will take several hours after the polls close to complete all of the checks on the postal votes before we can start counting,” according to a council statement.

‘No Good Reason’

Labour is pushing voting districts not to delay the count, said Justice SecretaryJack Straw. “We believe that there is no good reason in the vast majority of cases why counting cannot take place on election night as it has in the past,” he said.

When polls close at 10 p.m., BBC and ITN television news will publish exit polls. In 1992, these polls told Conservative Prime Minister John Major mistakenly that he’d lost. Robert Waller, the co-author of “The Almanac of British Politics” who worked on that poll, said the error was partly due to the exclusion of last-minute voters who favored the Conservatives.

“Since then, the exit polls have been very close indeed,” he said in an interview. “I think they will be again. But don’t forget that even being a fraction of a percent out will make 10- 20 seats difference on the majority, or lack of one. If an exit poll is more accurate than that, it’s pure luck.”

Polls suggest that any Conservative majority may fall within that margin of error.Rob Hayward, a former Conservative lawmaker who now advises the party on technical aspects of elections, predicts a Conservative majority of about 30 seats.

‘Morning After’

“There are enough marginal seats that are counting the next day that no one will know the result the morning after,” he said. “It’s unlikely Cameron will cross the line until at least midday and possibly 2 p.m. on the Friday.”

Ruth Fox, director of the parliament and government program at the Hansard Society, a political-education charity, said it could take even longer.

“It’s conceivable that we may not get the result until Saturday,” she said in an interview. “If it is that close, the market just won’t know.”

Major’s surprise victory over Labour in 1992 pushed long- dated gilt futures up 3 percent between the close on polling day and the markets’ open the next day. Trading volume the day after the election exceeded the four preceding days combined total.

Stocks’ Gains

Then, the result was clear by 3:30 a.m. and the benchmark FTSE-100 stock index opened up 5 percent.

Stephen Lewis, 61, who has 40 years of experience in the financial industry, said the election of 1974 may offer a precedent for 2010: no one emerged with a majority, resulting in four days of negotiations over who would form the government. In the end Labour, who took more seats, formed a government instead of the Conservatives, who won more votes.

“There was real uncertainty,” said Lewis, now chief economist at London-based Monument Securities.

“One could imagine that today’s market will be flying around a lot on the uncertainty,” said Lewis. “But very small amounts are going to be moving around in the morning awaiting the result. If the result is unclear, the real-money investors will be holding back waiting for information, leaving the market to the traders.”

To contact the reporter on this story: Robert Hutton in London atrhutton1@bloomberg.net; Kitty Donaldson in London atkdonaldson1@bloomberg.net

Last Updated: January 19, 2010 19:00 EST