Securities & quantitative trading: the code behind the trade.

Systematic trading sits at the intersection of financial regulation, tax law, and software engineering — and most attorneys understand at most one of those three. We represent quantitative traders, proprietary trading firms, commodity-pool operators, and algorithmic fund managers across the full range of legal issues that arise when machines execute trades at speed.

From structuring a new trading entity and navigating CFTC registration thresholds, to defending against spoofing allegations or advising on the tax treatment of futures and options positions, we bring both legal depth and firsthand technical knowledge to every engagement. We run algorithmic trading strategies ourselves. We know how these systems work, and that changes the quality of the advice.

Section 1256 of the Internal Revenue Code governs the tax treatment of regulated futures contracts, foreign currency contracts, non-equity options, and dealer equity options. Positions held under Section 1256 are marked to market at year-end and taxed under a 60/40 blended rate — 60% long-term capital gains, 40% short-term — regardless of actual holding period.

For systematic traders, the classification questions compound quickly. Which instruments qualify? How do crypto futures and prediction-market contracts (Kalshi, etc.) interact with the 60/40 treatment? When does a hedging transaction knock a position out of § 1256? We advise on these questions before the trades go on, not at year-end when the damage is done.

Key Tax Issues

• Trader vs. investor vs. dealer status: IRS classification determines whether you can deduct trading expenses, use mark-to-market accounting, and how wash-sale rules apply.
• § 475(f) mark-to-market election: available to traders in securities; eliminates wash-sale rules and converts gains/losses to ordinary income. Election timing and revocation rules are strict.
• Straddle rules (§ 1092): offsetting positions that reduce risk of loss can defer deductions and affect holding period — systematic strategies frequently trigger these rules inadvertently.
• Constructive sales and wash sales: automated rebalancing and HFT create wash-sale exposure that manual traders rarely encounter at the same scale.
• Fund vs. SMA structuring: tax pass-through treatment, K-1 complexity, and entity-level elections for CPOs and CTAs.

The CFTC and NFA govern most futures, swaps, and commodity-derivatives activity. Algorithmic traders face registration requirements, capital requirements, and conduct rules that differ significantly from SEC jurisdiction.

• CPO & CTA registration: whether your fund or advisory business requires registration as a Commodity Pool Operator or Commodity Trading Advisor, and which exemptions (4.13(a)(3), 4.14(a)(8)) are available based on your strategy and investor base.
• Reg AT compliance: CFTC Regulation Automated Trading requirements for pre-trade risk controls, development and testing standards, and source-code recordkeeping for algorithmic strategies.
• Spoofing & manipulation defense: post-Dodd-Frank § 747, spoofing and layering are criminal offenses. Algorithmic strategies that generate patterns resembling spoofing can attract regulatory scrutiny even without manipulative intent.
• Large-trader reporting: CFTC Form 40 obligations for traders holding positions above reportable levels, and the recordkeeping that accompanies them.
• Swap-dealer thresholds: whether your OTC derivatives activity triggers dealer registration under Dodd-Frank Title VII, including major-swap-participant de minimis calculations.
• SEC / FINRA equity rules: Pattern Day Trader (FINRA Rule 4210), proprietary trading firm structure, Rule 10b5-1 trading plans, Reg SHO short-sale requirements, and algorithm IP protection.

The regulatory treatment of digital-asset derivatives, tokenized securities, and event contracts (prediction markets) remains unsettled — but the legal exposure isn't. We advise traders and platforms operating in these markets on the applicable regulatory framework, whether CFTC-regulated event contracts on platforms like Kalshi qualify for § 1256 treatment, and how to structure operations to minimize regulatory risk as enforcement postures evolve.

We also advise on the intersection of securities law and blockchain — token classification under the Howey test, exchange registration requirements, and the litigation landscape following enforcement actions against digital-asset platforms.