Traders selling, and then repurchasing, the same stock, bond, option or future, is a topic facing increasing regulatory scrutiny. For systematic hedge funds trading in the U.S. — some of whom are shelving out seven figure sums for internal technology or facing expensive inquiries due to accidental violations — it has proved an expensive development. Wash sales, as they are known, are a market violation when deliberately carried out in order to change the price of a given product but managers who run several algorithms in different directions may — without meaning to — transact with one another. However, the enforcers, the regulators and the exchanges aren’t sympathetic to this defense, claiming managers should have adequate wash sale blockers and other protections.
Click here to read the HFMWeek article where I talk about the challenges some fund managers face when setting up internal netting systems to identify and match these trades.