I don't really know what exactly Delta One desks are doing.
So I was wondering if anyone was kind enough to share any papers, articles, blogs that kind of explains Delta One trading Desks activities nowadays.
Best, Axel
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4$\begingroup$ this question feels quite lazy to be honest. googline "delta one trading" gives me the following as the first four results: 1. How 'Delta One' really works, 2. The Origins and Evolution of Delta-One, 3. Delta One Wikipedia page, 4. What are Delta-One Trading Desks. $\endgroup$– willCommented Oct 27, 2018 at 12:38
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1$\begingroup$ Good def in 1st link: "In return for a small fee [...] Delta One desks, which exist in many banks, offer to provide [clients] the return of a particular index without the hassle of buying the underlying securities. They then buy the underlying securities or various derivatives to gain the exposure required. Around the edges they trade to generate a profit on top of their fees." "These trades tend to be in very large size because margins are miniscule. ... but the actual strategies should be relatively simple, although not risk free, like arbitraging and lending out shares held as collateral." $\endgroup$– Alex CCommented Oct 27, 2018 at 13:11
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1$\begingroup$ @AlexC "around the edges they trade" I think is the confusing bit for many people to understand what this actually means $\endgroup$– TrajanCommented Oct 27, 2018 at 14:19
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$\begingroup$ @AlexC "the actual strategies should be relatively simple" but not obvious from the outside $\endgroup$– TrajanCommented Oct 27, 2018 at 14:26
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1$\begingroup$ @Permian yes exactly it’s quite obvious how they business work from the outside $\endgroup$– Axel HaddarCommented Oct 27, 2018 at 14:36
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1 Answer
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Delta one trading desks provide synthetic exposure to their clients.
OK, so what does that mean? Delta One desks give their clients exposure to a product (stock index, ETF, or even a single stock) without the client actually buying the underlying product.
For example, a customer can take their money and buy the stocks in the SP500 index. Or, they can ask their Delta One desk to sell them a swap on the SP500 index. There are several factors that can make this attractive to a customer:
Can the client manage the underlying exposure? It might be a big ask for a client to keep up with all 500 stocks in the SP500 and rebalance along with the index.
Can the client access the underlying securities? It might be hard for a foreign investor to buy a certain local security and to deal with FX.
If the client buys the swap from the Delta One desk instead of using their cash to buy it, what can the client otherwise do with their money? For example, if the Delta One desk will charge the client a 2% interest rate to give them the returns of the SP500, the client can take their cash and instead buy a security with a higher rate of return.
Will the customer gain privacy from buying a security in synthetic form? For example, a client wants to buy 2% of shares of company X. If the client buys the shares then it can become known eventually. If the customer buys on swap from the dealer then all you would see in the holders listing is the bank that bought the swap to hedge the swap and not the real beneficial recipient of returns. There are filling rules that limit this past a point, but it lets an investor get a little bit of anonymity at first.
Here's a screen shot of the Bloomberg SDR screen. You can see the swap trades that were reported recently to the DTCC:
You can see the various products that some delta one desk wrote a swap on to their customers.
Take row 7 for an example. That shows that a D1 desk bought or sold $2,000,000 of notional swap on the RTY (Russell 2000) Index to a customer. The swap expires Nov 6 and the price is -35. Now, we don't know what that -35 means. It most likely is a reference to some kind of funding index - almost always 3 month libor or 1 month libor.
Probably in this case the customer wanted short exposure to this index. The bank agreed that the customer would sell them exposure on the RTY index (if the index goes up the customer owes the bank and if the index goes down then the bank owes the customer) and in return the bank will pay 3month libor less 35 basis points to the customer.
Does that explain it? I can give you more details if you want.
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$\begingroup$ How do d1 desks trade around the edges? see comments above. thanks $\endgroup$– TrajanCommented Oct 28, 2018 at 11:18
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$\begingroup$ A few ways come to mind: 1. As a flow desk sees the customer interest they can trade in the market along with it. For example, if customers all want to go short equity exposure, then a D1 desk might decide to start accumulating stock borrow capacity in advance before it gets more expensive. 2. Since the actual exposure to the client is synthetic the D1 desk has room to take risk. For example, if a customer wants $100mm of exposure to the XLV ETF based on today's close, the D1 desk could decide to take some risk and not trade the entire order. $\endgroup$– JoshKCommented Oct 28, 2018 at 19:39
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$\begingroup$ 3. A D1 desk might start to get exposed to certain positions as they trade in various terms with clients. The desk might be long 3m libor payments vs 1m libor receipts. The D1 desk can chose to keep some of those exposures or hedge them. That gives an interest rate profile to the book and is a source of risk and potential profit. $\endgroup$– JoshKCommented Oct 28, 2018 at 19:40