Delta One and Un-understood Risks


Do you know about Delta One Desks? You will know more after today, considering it may be the division that is causing UBS to suffer yet another OMG “rogue” trading loss of $2 billion: Adoboli held over $2bn UBS “rogue trade”. Adoboli’s Linkedin page says he is director of ETF and Delta One Trading at UBS.

Delta One desks are named for the “neutral” type of trading strategies that exploit minute arbitrages among indexes and instruments trading in the plethora of trading destinations worldwide that they trade in. They are one of Wall Street’s best kept secrets. Every financial institution is deeply involved with Delta One trading. Delta One desks typically deal in prop high frequency trading centered around ETF’s, swaps, baskets, and also include futures and options. If you know this much, you know more about Delta One than most on the street.

If you are a hedge fund, and you want exposure to US oil refiners, excluding Haliburton and Baker Hughes, you might ask your brokerage firm to create a swap-based product for that customization, and Delta One would likely be involved. Lots of math and correlation is involved folks, more than my cave man brain typically can handle.

But you should also understand that Delta One is also about collateral, security lending and funding, and perhaps even ETF basket collateral.

I learned about Delta One over a year ago from, in my opinion, Business Journalism’s greatest reporter, Isabella Kaminska, of the Financial Times. In fact please read what she had to say about Delta One just a few months ago on the FT’s Site: Deta One: the Special Ops of Trading.Considering how large ETF’s have become relative to the market, and that the collateral involved in their creation/redemption processes by Authorized Participants can be varied and not intuitive, and that these activities fall under Delta One typically at Big Banks, perhaps it is time for Delta One to become less of a secret. Especially With the Regulators. Talk about un-understood divisions and black swan potential.