The Delta One business is a type of market making for liquidity and risk management clients that seek economic exposure of a security without the complexity of carrying the underlyings. In this report, Finadium surveyed European Delta One desks on client behavior, market structure and opportunities for growth in 2019.
Over the years, Delta One has taken on different meanings at different banks. Some desks trade all Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN) products, some are merged with prime brokerage or securities lending, while others are stand-alone profit centers. The business can be called Delta One, Flow Trading, Systemic Trading or Synthetic Equity.
A European product focus on financing, dividends, swaps or ETFs does not always align with the same business in other parts of the world; US Delta One desks for example have much less focus on dividends and more on swaps. This lack of uniformity can complicate definitions of “the Delta One business”. That said, nearly all the Delta One desks we spoke with for this report said they have an independent P&L, which is best practice in the industry. Only one desk’s P&L was blurred more generally with prime brokerage.
While Brexit and SFTR are broad-based themes on Delta One desks, other trends related to sourcing liquidity and technology buildouts have become more important to different desks at different times. Even Total Return Futures, a potentially compelling newer product, has not yet captured the attention of every desk. Our survey finds a disparity in not only how much effort desks have put into their infrastructure development, but also how much they are pushing for central clearing and their expectations of a healthy business environment in 2019.
This report is a first pass at unpacking the workings of the European Delta One industry in the current market environment. The report should be useful reading for Delta One traders as a peer comparison, for Delta One clients, and for associated business managers in prime brokerage, securities finance and equity trading.
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