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Ren Tech, Four Levels of Science, Blackrock ETFs


Matt Levine, DealBreaker, Renaissance Technologies: Buy-And-Hold Investor, here.

The trick is that this transforms Renaissance’s high-frequency trading in and out of stocks – in, call it, a margin account at its prime broker – into Renaissance buying and holding a two-year option on … a basket of whatever stuff it wants to buy and sell each day. Trading every day gets you short-term capital gains, taxed at a 35-39.6% rate; holding for longer than a year gets you long-term capital gains, at a 15-20% rate. Renaissance, it appears, has been claiming that it owned only the option, not the stocks, and since it held for longer than a year it only owes long-term capital gains taxes. That is obviously absurd, but it is also cleverly absurd, and the tax code does reward cleverness.

Nonetheless, you might not be surprised to learn that the IRS is pissed. The IRS is pissed, because itknows that this shouldn’t work, though it can’t quite get its head around why.5 This isn’t a long-term option: this is frequent trading in a margin account, subject to a margin loan, and wrapped up in some words that make it a long-term option.

Banks Preferred Profitable CDS Business Over Less Profitable One, here.

Incidentally if you’re building yourself a derivatives business in the shadow of increasing electronification and exchangification and antitrust enforcement, how do you, like, moat it up? Well, popular products that are useful to a lot of customers in a lot of situations seem like the ones most likely to move to exchanges. Those tend to be products that solve economic problems: hedging macro credit risk and stuff. Contracts built to solve regulatory problems, on the other hand, are more likely to be one-off. And customized. And the sort of thing that the client isn’t really looking to publicize. You won’t see Renaissance’s basket option contract listed on the CME any time soon. Which makes it a good business. Though I guess it’s illegal too.

Noah Smith, Noahpinion, Four Levels of Science, here.

If you haven’t yet read “Tantalus on the Road to Asymptotia“, Ed Leamer’s recent essay, and if you’re at all interested in statistics, empirical economics, or science in general, then you should go read it. The essay is primarily a reply to an extremely important 2010 discussion paper by Joshua Angrist and Jorn-Steffen Pischke, called “The Credibility Revolution in Empirical Economics“. That paper in turn is mainly a response to a 1983 Leamer essay called “Let’s Take the Con Out of Econometrics“. Such are the time scales over which deep academic debates are conducted. Actually, you should read all three.

Izabella Kaminska, Alphaville, Blackrock: ETFs are the true market, here.

What they failed to mention is that the reason they had to reconfirm that these APs were still committed to supporting their ETFs is probably because err.. most of them are not obliged to support their ETFs, especially if the consequences of doing so involve too much risk for their balance sheets.


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