In my earlier posts I have always defended high
frequency trading, but decried the bad behaviour that often accompanies
such trading, mostly by hedge funds and trading on dark pools.
An ingenious practice that exploits a a loophole in tax law enables HFT practitioners to treat short term gains as long term ones for tax purposes through strategies using basket options contracts, and products called maps and colts. There is a fascinating article at http://www.theguardian.com/
Most of these contracts involve a hedge fund and an investment bank, partners in crime. Incidentally, apparently there is nothing illegal in this practice that has yielded over $6 billion in taxes avoided. The prime practitioners of this sinister artform, apparently, are Deutsche Bank and Barclays. One of the main operatives in this arena is, unfortunately, a hedge fund (Rennaissance Technologies) founded by one of my heroes, Jean Simons, a mathematician from MIT and Berkeley and a philanthropist.
In all these cases, the trick is to not trade in a usual brokerage account in order to circumvent the 2:1 maximum leverage introduced after the 1929 crash; the conversion of short term into long term gain is the icing on the cake in this game. The leverage in many of the cases has exceeded 20:1. Carl Levin has called these "fictional derivatives" for a good reason. A report by the United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Committee on Homeland Security and Governmental Affairs titled "ABUSE OF STRUCTURED FINANCIAL PRODUCTS: Misusing Basket Options to Avoid Taxes and Leverage Limits" is attached.
Here are some diagrams detailing the strategies (Source: http://www.zerohedge.com/news/
Some sources:
www.theguardian.com/money/us-
http://www.zerohedge.com/news/
http://www.hsgac.senate.gov/
An ingenious practice that exploits a a loophole in tax law enables HFT practitioners to treat short term gains as long term ones for tax purposes through strategies using basket options contracts, and products called maps and colts. There is a fascinating article at http://www.theguardian.com/
Most of these contracts involve a hedge fund and an investment bank, partners in crime. Incidentally, apparently there is nothing illegal in this practice that has yielded over $6 billion in taxes avoided. The prime practitioners of this sinister artform, apparently, are Deutsche Bank and Barclays. One of the main operatives in this arena is, unfortunately, a hedge fund (Rennaissance Technologies) founded by one of my heroes, Jean Simons, a mathematician from MIT and Berkeley and a philanthropist.
In all these cases, the trick is to not trade in a usual brokerage account in order to circumvent the 2:1 maximum leverage introduced after the 1929 crash; the conversion of short term into long term gain is the icing on the cake in this game. The leverage in many of the cases has exceeded 20:1. Carl Levin has called these "fictional derivatives" for a good reason. A report by the United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Committee on Homeland Security and Governmental Affairs titled "ABUSE OF STRUCTURED FINANCIAL PRODUCTS: Misusing Basket Options to Avoid Taxes and Leverage Limits" is attached.
Here are some diagrams detailing the strategies (Source: http://www.zerohedge.com/news/
1. MAPS (Managed Account Product Structure)
2. COLT
Like Jean Simons, I still think HFTs perform a
tremendous service by providing liquidity and better pricing of
products. The culprit is the bad behaviour that HFT engenders (such as
front-running and deliberate introduction of information asymmetries).
We should hope that in getting rid of such bad behaviour we do not throw
the baby with the bathwater.
www.theguardian.com/money/us-
http://www.zerohedge.com/news/
http://www.hsgac.senate.gov/
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