Peter Tchir of TF Advisors gives some color on the JPM Trade.
We have talking about what may or may not have happened at JPM for the past week, and by “we” I mean the entire market. We do not know the exact nature of their trades, but as far as we can tell from what we read and the rumor mill, JPM had a series of complex trades, though the overall ideas seemed to be “short high yield” and cover the costs by being “long investment grade” with a particular emphasis of jump to default risk over pure spread risk (though spread risk played a big part).
They were short various XOVER and HY indices, both outright and in tranche form. They were long various IG indices, both outright and in tranche form, though with a few additional curve trades to manage the jump to default risk.
We have tried to estimate the scale of the positions by asking “how much would JPM want to make if HY sold off 10%”. Using that, and a guess of $5 billion, it gives you a reasonable guess that the HY short had to be the “delta equivalent” of $50 billion. The term “delta equivalent” is important, because a $1 billion move in the index, can have a “multiplier” effect on the price move in the tranche. In general, the first loss tranches will move much more than the index, so a $1 billion position in a tranche can behave like a $10 billion index position. A bit confusing but if you think of it if terms of how a “deep in the money” an “at the money” and a “way out of the money” option react to the price moves of the underlying stock, it is somewhat similar.
This week, average Joe was introduced to Delta One Trading. Although the name has always confused us, delta one is supposed to be “hedged”. Delta One products are a class of financial derivative that have no optionality and as such have a delta of (or very close to) one – that is to say that for a given percentage move in the price of the underlying asset there will be a near identical move in the price of the derivative. Delta one products often incorporate a number of underlying securities and as such give the holder an easy way to gain exposure to a basket of securities in a single product. Examples include equity swaps,forwards, futures and ETFs. (Wikipedia).
According to UBS, there had been unauthorized trading at the Delta One department at the London branch. We will surely read more on this subject, as there usually is a great scape goat, and that always make a juicy story, so focus shifts away from the company. Summary below of the various pieces on the Rogue Trader, if true or not, let’s see, but at least articles covering multiple aspects of this peculiar story.
Sunday reading by MoreLiver.
UBS ROGUE TRADER
Linkedin profiles of the perp and his boss. Delta One, just like in SocGen
The curse of Delta one strikes UBS – alphaville / FT
Internal memo to employees
UBS rogue trader – alphaville / FT
Indirect cost increases: more risk management, investor risk aversion, bad reputation
UBS rogue trade – the wider costs – alphaville / FT
FSA broker profile, Twitter account, also points out that similar trouble in quant funds can be expected.
UBS Reports $2 Billion Loss by Rogue Trader – DealBook / NYT
Mandatory look at previous famous cases.
Traders Gone Rogue: A Greatest-Hits Album – DealBook / NYT
Points out that UBS’s risk management has been criticized in the past, too.
Why Didn’t UBS’ Risk Systems Throw Up an Alert? – The Source / WSJ
Full list continue below.