UBS case: How could one trader lose $2 billion?

NEW YORK -- The full story about how a 31-year-old rogue trader arrested for allegedly losing $2 billion of a Swiss banking giant's money in a fraudulent scheme has yet to be told by the bank, Europe market regulators or London police.

And it might be weeks or months before a full accounting of how all the money was lost and the circumstances behind one of the biggest trading miscues in history.

But by analyzing all the snippets of information about the case — as well as information the alleged perpetrator posted about himself on social networking sites, insights into the trading strategy he employed, the charges outlined by prosecutors, and interviews with trading experts — a number of possible yet unofficial scenarios of what might have happened can be stitched together.

The basic facts of the latest scandal to rock the financial world are well known.

Kweku Adoboli, a London-based UBS trader from the bank's investment banking unit, was arrested early Thursday morning amid allegations that he lost up to $2 billion of the bank's money after engaging in "unauthorized trading," according to a terse four-sentence statement by the bank Thursday. In a letter to employees, the bank's executive board said the matter was "still being investigated," and that the bank "will spare no effort to establish exactly what happened."

The fact that the bank's risk-control systems were unable to identify Adoboli's highly risky trades, which date as far back as fall 2008, according to the police complaint, has put the bank under sharp scrutiny.

Type of trades

What is known so far comes mainly from Adoboli's postings on social networking sites, including Facebook and LinkedIn, and details released Friday in the three charges filed against him in a court appearance, where he didn't enter a plea.

On his LinkedIn profile, Adoboli provides two key pieces of job-related information that could be central clues to the case. The first is that he worked on a trading desk that engages in a type of trading referred to as Delta One. The other is that his prior job was as a trade support analyst, better known as the back office.

The Delta One strategy gave him the platform to trade. His prior experience gave him an insider's view into how the firm inputs, tracks and accounts for trades — knowledge that potentially could have been used to cover his tracks.

Delta One trading strategies are among the fastest-growing growth areas for big banks, according to JP Morgan analyst Kian Abouhossein, who put out a report on Delta One in September 2010. Delta One products will generate estimated revenue of $11 billion this year, the report says.

In simplistic terms, Delta One business allows banks to trade or create securities that track an underlying index or asset class, such as the Standard & Poor's 500 index.

There are six types of Delta One businesses, including exchange traded funds. ETFs are similar to mutual funds, in that they track baskets of stocks, such as the S&P 500, but trade like stocks, which allows investors to get broad exposure to an asset class but with the ability to trade them throuhout the trading session. Mutual funds simply give investors a end-of-the-day price, which limits a trader's flexibility to get in and out of a position quickly.

Adoboli was an ETF director as well as a Delta One trader, according to his LinkedIn profile.