(Adds CLS trading details)
By Saikat Chatterjee
LONDON, March 13 (Reuters) - Trading volumes in sterling futures and options markets surged on Tuesday after Prime Minister Theresa May suffered a heavy defeat in a vote on her Brexit withdrawal agreement, CME said on Wednesday.
In an exceptionally volatile day for the British currency, pound futures and options turnover on the CME - one of the world’s biggest exchanges - surged to more than 375,000 contracts, the largest day in 2019 and the fifth biggest since the Brexit referendum vote in June 2016.
The British currency has swung wildly between $1.30 and $1.33 in chaotic trading over the last 48 hours as a raft of headlines on the progress of Brexit negotiations culminated in a big defeat for May’s tweaked Brexit deal, unnerving investors.
Investors and hedge funds rushed to trade pound futures sending daily turnover to more than double this year’s average at around 133,000 contracts.
“We are seeing increased pound turnover on our platforms as the markets are pricing in some sort of a soft Brexit option,” said a senior managing director at a London-based inter-dealer broker.
Traders said trading was dominated by momentum players and algorithmic trading rather than institutional investors who were broadly sidelined in an important week for British politics.
CLS data showed an initial surge in turnover in early London hours between 0900 and 1100 GMT after Britain’s Attorney General Geoffrey Cox said the legal risks to the Irish backstop, or protocol, remained unchanged despite assurances from the European Union.
While turnover declined after that through the day, it picked up briefly in late New York trading hours when May’s Brexit deal was rejected by Parliament.
In a series of three major votes this week, lawmakers are voting on whether to accept May’s tweaked deal, rule out the possibility of Britain crashing out of the EU without a deal on March 29, and seeking a delay to the exit date.
The sharp swings in the pound in the spot market were also due to broad market positioning which was broadly neutral across banks’ platforms.
The sharp swings in the cash markets also rippled over into the currency derivative markets where expected gauges of pound volatility shot to the highest levels this year on Tuesday.
Reporting by Saikat Chatterjee Graphic by Ritvik Carvalho Editing by Tommy Wilkes and Frances Kerry