When Alex Gerko of XTX was the man to know if you wanted to get paid

XTX, the electronic trading firm founded by former Deutsche Bank trader and nature lover Alexander Gerko, pays very well. Average total compensation for employees there was £457k last year. Average pay for partners there was more like £20m. Averages can be deceptive, though. There is always a skew, and in the historic entity that preceded XTX, at least one man seems to have had at lot of influence over it.

Alexander Gerko.

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Yesterday's Supreme Court Judgement on the tax arrangements of HFFX LLP, a subsidiary of GSA Capital from which XTX spun out in 2015, not only deems that the "capital allocation plan" HFFX used to pay traders was intended to avoid tax, but highlights Gerko's role in determining who got paid what under it.  

In the years between 2010 and 2015, back when the disputed capital allocation plan was in action, the court judgment said it was Gerko who calculated the share of profits that should go to each of the people at the HFFX subsidiary. Gerko's team were involved in 'researching and formulating high frequency forex trading strategies for implementation through automated trading.'  

As at XTX, working for HFFX was lucrative. The judgment says Gerko's people were given a "trader payout" equivalent to an enormous 50% of their profits. Gerko himself would recommend how much each person received. After deductions, Gerko had control over the allocation of 90% of the profits that went to the firm's partners. 

Gerko had a lot of power. The court judgment also notes that Gerko made recommendations for whether people leaving HFFX should be considered good or bad leavers. If a partner was deemed a bad leaver, the money he or she left behind was reallocated to others. It was also used to fund HFFX's legal bills against them.   

This sounds painful. Being a good leaver mattered because a large chunk of compensation was deferred. HFFX partners received the first £100k of their compensation in cash, plus 50% of the remainder. The other 50% of the leftover money provisionally allocated to them was given to GSA, which then invested it and released it back to HFFX (after tax and expenses) as "special capital". The capital was given to the partners, tax free, on the first, second and third anniversaries. Bad leavers didn't get their pending awards. Sometimes people agreed to a three year non-compete simply so they could be deemed good. 

However Gerko could also intervene before the special capital was finally handed out. The judgment noted that Gerko could flex the amount of special capital finally allocated to each partner, even after GSA had invested that individual's initial allocation. Sometimes Gerko flexed because a partner had underperformed. Sometimes he flexed because a new partner had been hired and the special capital needed to be spread more thinly.

HFFX argued that the special capital didn't need to be taxed because the individuals were "carrying on a trade" and "giving commercial advice" and because they didn't have "personal clients" and because they weren't carrying on a profession. They were overruled. 

The FT says £22m of tax must now be paid on the historic profits. Gerko wrote on LinkedIn: “Pretty astonishing from HMRC to get 70 per cent effective tax rate and also gloat about it.”

The details in the judgment are now over 10 years out of date. Since spinning out of GSA, XTX has morphed into an enormous trading house handling $250bn of daily trades. Special capital is not a thing at XTX. It probably still helps to get along with Gerko if you work there, but it's not clear whether Gerko also decides everyone's pay. XTX declined to comment.

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