Trading tactics: Soc Gen's Jérôme Kerviel and UBS's Kweku Adoboli

Like the Société Générale rogue trader, Adoboli worked on a trading desk known as delta-one

Comparisons are being made between Jérôme Kerviel, the rogue trader at the French bank Société Générale, who caused £7bn of losses in 2008, and the latest trader to face allegations of racking up losses, Kweku Adoboli.

They were both 31 when they faced the allegations for the first time and they both worked on trading desks known as delta-one, supposedly a low-risk area where tiny differences in prices are exploited to try to make big profits.

But there are also some obvious differences between the two. Kerviel was found guilty, despite his protestations, and ordered to pay €4.9bn to the bank. Adoboli has not been charged with any offences.

The function of delta-one trading desks is that they buy shares, for example, then cover their exposure, through hedging, by selling the same amount of shares. There is though usually a difference in price between the two (known as delta) from which the traders make their profit.

City sources say that they deal frequently, and in large amounts, to keep the profits coming, and that the desk at the City bank UBS had been having a particularly profitable year.

Adoboli's trading had an extra layer of complexity as he was an expert in exchange traded funds (ETFs). These are a relatively new innovation – complex packages of financial instruments intended to mimic market movements. So, for instance, while an investor might buy a FTSE 100 fund that tracked the index, since it contained all the shares in the index, a FTSE 100 ETF might not hold all the shares to copy the movements; it might comprise derivatives and other financial instruments that would allow the ETF to replicate the index's price.

As their name suggests, these ETFs are traded on exchanges and they are not all as simply structured as the FTSE 100 index example above. They can be based on commodity prices or any other type of financial product the investor wants.

There were suggestions that Adoboli had been involved in complex trading strategies involving the Swiss franc, which had been exposed after the Swiss National Bank announced last week that it was not going to allow the franc to be worth more than €0.83 (€1 equating to SFr1.20) after the two currencies had raced toward parity during the euro zone crisis.

The action by the Swiss bank was unexpected and caused the franc to move by 8% – a huge move for a currency – shortly afterwards.

Contributor

Jill Treanor

The GuardianTramp

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