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That could support a rally in 10-year Treasury bonds and help stocks extend their recent gains, they said. "I think the markets are rallying at the prospect of gridlock," said Jack Ablin, chief investment officer at Cresset Capital in Chicago. Historically, stocks have tended to do better under a split government when a Democrat is in the White House, with investors attributing some of that performance to political gridlock that prevents major policy changes. The benchmark index has risen about 5% over the last month, cutting its year-to-date decline to about 20%. With U.S. equity options market positioned for relative calm, a surprisingly strong showing by Democrats could upend markets.

Reuters Graphics Reuters GraphicsAmong factors fueling the swings is a flood of options trades, many of them short-term in nature. A surge in options trading tends to boost hedging by market makers – typically large banks or financial institutions that facilitate the trades and need to position in equity futures to reduce their risk from unexpected market moves. Their furious buying and selling can heighten short-term swings in stocks, adding to broader volatility, market participants said. LOW POSITIONINGMeanwhile, many so-called "real money" investors such as pension funds and mutual funds have cut their stock allocations to the bone after months of equity volatility, another factor fueling stock swings. At the same time, under-positioned investors have recently tended to jump aboard stock rallies, further extending the moves, market participants said.

British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. Deutsche Bank's Currency Volatility Index – the historical volatility index of the major G7 currencies - jumped to a two-and-a-half year high of 13.55 on Monday. While Sterling and the yen have fared extremely poorly against the dollar, the greenback's meteoric rise has spared no major currency. Reuters GraphicsMoves have surprised long-time currency traders and investors. "Our team is working around the clock from multiple global locations," said Kamboj, adding he is not trading sterling because the pound's direction now depends entirely on how the Bank of England reacts.

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