Notice: The opinion below is based on the information referred to in our reply and is provided to the best of our knowledge at this time. Please check with your Clearing Firm to make sure that their policies on sub-accounts are in line with what is offered below.
#1 - I don’t think futures against ETF’s would be considered a wash trade, but I am not sure. I couldn’t find anything to support this.
I did find this document from the ICE Exchange that I think is really well done. It is from 2016 and breaks the information down quite nicely. It goes over wash trades in futures quite clearly and simply. https://www.theice.com/publicdocs/futures_us/Wash_Sale_FAQ.pdf
My thoughts:
The issues listed in the document is why traders have difficulties opening Sub accounts. These sub accounts need to have a bona fide business purpose for offsetting positions. For example, I think swing trading vs day trading is a bona fide business purpose as the trader is implementing two different trading strategies over different time frames. A bona fide hedge against a physical would work as well.
When opening sub accounts, traders must agree that all of the trading in this account will be initiated by individuals authorized to trade for the account solely for benefit of the account. Under no circumstances, will the trading activity in this account be for beneficial ownership of interest of other parties. – cooperative wash trading.
From ICE FAQ
What is a wash trade?
A wash trade is a transaction or a series of transactions executed in the same Commodity
Contract and delivery month or Option series at the same, or a similar, price or premium for
accounts of the same Principal.
The term “Principal” as used herein shall mean an individual or entity with a beneficial
interest in an account.
The term “same Principal” as used herein shall mean accounts that are owned by the
same person, entity, or a parent and its 100% wholly owned subsidiaries, or subsidiaries
that are wholly owned by the same parent and shall also include accounts that have
common ownership that is less than 100%.
A wash trade occurs when there is an act of entering into, or purporting to enter into, transactions
with no intent to obtain a bona fide market position or activity that gives the false appearance of
an executed transaction(s), but does not subject the Principal to any market risk or change in
position or aid in price discovery. Such trades are prohibited by the Commodity Exchange Act,
and Exchange Rule 4.02(c) which prohibits the execution of wash trades. Any market participant
who initiates, places, accepts or accommodates a transaction in a manner such that the
participant(s) knew or should have known it would result in a wash trade will be violation of
Exchange Rule 4.02(c)1
.
In addition, if it is determined that simultaneous buy and sell orders are for different Principals
such orders must be executed in accordance with Exchange Rule 4.02(g). This Rule, however,
prohibits market participants from contemporaneously entering both buy and sell orders for the
same Commodity Contract in the same delivery month or Option series via a Crossing Order
(“CO”) unless such orders are for different Principals.
Hope this helps.
Anthony Giacomin
Managing Partner
Stage 5 Trading Corp.
Risk Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results.
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If I'm understanding the ICE document it's addressing a scenario where a participant simultaneously buys/sells a contract. So, different than the type of wash sale I was thinking of with a stock where you have the 30 day wash sale window after a loss.
After some more Googling I found this on Investopedia:
and
It seems that if I'm just trading in a single account and not taking simultaneous offsetting positions then I wouldn't be committing wash sales of any sort.
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There's two meanings for wash trades.
I think you are talking about the IRS's definition of a Stock/Equities wash trade - which is all tax related, while @Stage5 Anthony is highlighting the CFTC/Futures definition - which is related to whats legal and what isn't.
If your question is, does the IRS Wash Trade rule apply to futures, the answer is NO. All futures trades are marketed to market at year end, and as such FIFO, LIFO or wash trade accounting are all irrelevant.
With regards to the ICE definition, I believe a key expression is "but does not subject the Principal to any market risk or change in position or aid in price discovery." Without that expression it would be illegal to enter into cross exchange arbitrage, but the addition of "aid in price discovery" could be be abused in my opinion.
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True story, back when ICE was an OTC trading platform, before they bought the IPE (Brent), LIFFE and the NYSE, there was a point in time where you could actually quote a market as 'choice' meaning you would bid and ask at the same level. Why would do that? Simple information. Also it was possible that a market could be choice meaning bid and ask at the same level and be different counterparties. How or why? Because this was OTC not cleared futures. The buyer and the seller may not have credit with each other!. So if you were a big player/primary dealer/800 lb Gorilla/the big 'dog' if you saw that you would enter a choice market yourself and get filled instantly on both buy and sell BUT with two different counterpaties. Now you know who is buying and who is selling. Wash Trade? Nope.
This both aided in price discovery AND involved credit risk. Remember not cleared products.
I still really don't appreciate the severity of the fines. If you are trying to move money around there still is no guarantee, so you still have other risks, maybe taxes but not market risk. I just wonder if there is a deeper benefit?
I have seen many and the fines are fairly substantial, also some interesting ones about placing wash trades during the 'pre-open' and then not being able to close during the 'lock time' and therefore incurring a wash sale, huge fines!!! ...
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No. My comments referred to 'old world products' 20'ish years ago. I'm not 100% sure when ICE removed this functionality but 10 years ago when Dodd Frank became legal ICE converted all the old OTC products into futures so it was definitely prior to that. NOTE Even prior to that, OTC is limited to ECPs only. So this was the big boy market with no retail traders. I was just telling a story for history and background not to allege misconduct.
