Dealbook delta one desks are big moneymakers

Most Wall Street firms have such desks for their clients. Buying a derivative that closely tracks an underlying asset can be easier or less risky than buying the asset itself.

Instead of buying bars of gold, a hedge fund manager may buy an exchange-traded commodities fund, or even a gold fund. These derivatives can also be attractive because they typically require little upfront capital. In some cases, the Wall Street firms themselves try to profit from the tiny differences between the values of the derivatives and the underlying assets.

In recent years, the desks have generated billions of dollars for Wall Street firms.

A reason for the success of this particular desk is the explosive growth of exchange-traded funds — an investment class that tracks indexes or baskets of assets. On average, exchange-traded funds are expected to grow about 20 percent a year, as retail clients, hedge funds and institutions increasingly rely on these products for both exposure to the markets and as protection against volatility.

Also helping the growth of these desks is increased demand from investors for computer program trading, which uses mathematical models to execute lightning-fast transactions. Delta desks are a profitable business, and on the surface at least, not a particularly risky one.

But like many things on Wall Street, the practice can become perilous if not properly policed. UBS has not provided any details on the trading losses. The UBS trader suspected of the losses, Mr. Adoboli, was a director of exchange-traded funds on the Delta One desk in London. The losses could have resulted from a trade on a behalf of a client, in which case the bank would have taken the other side of the trade.

But the bank may have mistakenly allowed its position to grow excessively, or failed to hedge it. Or the bank could have decided to hold on to the position after making the trade for the client, thereby putting its own money at risk. Whatever the cause, the UBS trading losses are likely to rekindle the debate over proprietary trading, which has drawn increasing scrutiny from regulators since the financial crisis.

The so-called Volcker rule , under the Dodd-Frank overhaul of financial regulation , would prohibit such trading, although the details of the rule are still being written. Yet the definition of what constitutes proprietary trading can be fuzzy.

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The trading done on Delta desks, they contend, is done on behalf of clients. Those boundaries, however, can blur. A bank may buy a derivative or security from a client in order to make a market, then decide it is worth hanging onto, turning it into a proprietary bet. The Volcker rule of the Dodd-Frank act is named after Paul A.

Volcker , the former Federal Reserve chairman who proposed it. It is intended to prevent American banks from taking on too much risk. The fine print, however, has yet to be worked out, and regulators are debating just how comprehensive to make the definition of proprietary.

Under Dodd-Frank, foreign firms like UBS can still run prop-trading desks abroad. Goldman Sachs was among the first Wall Street firms to close its proprietary trading desks after Dodd-Frank became law. And Bank of America said this summer that its proprietary trading operation was officially closed.

Delta One operations are profitable. UBS will notch about 72 percent. Abouhossein added in his note that Delta One desks were expected to weather the regulatory overhaul better than other trading businesses. On Thursday, advocates for the Volcker rule used the UBS trading loss to highlight the need for increased regulation. Sections Home Search Skip to content.

The New York Times window. DealBook Delta One Desks Are Big Moneymakers. Subscribe Now Log In 0 Settings. Close search Site Search Navigation Search NYTimes. Clear this text input. By Susanne Craig and Azam Ahmed September 15, 9: Ben Protess contributed reporting.

Financial Services , Investment Banking , Delta One , Goldman Sachs , Jerome Kerviel , Kweku Adoboli , proprietary trading , UBS , Volcker Rule.