Rogue trading: why are speculators free to gorge on yet another acronym?

ETFs (Exchange Trader Funds) are behind the UBS rogue trading. Have we have learned nothing from the financial crisis?
    • The Guardian,
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Kweku Adoboli leaves City of London Magistrates Court in London
Kweku Adoboli leaves court having been charged with fraud after Swiss bank UBS said it had lost billions in unauthorised trades. Photograph: Toby Melville/Reuters

Remember sub-prime securities and all the other toxic financial instruments (RMBS, CDOs, CLOs etc) that made up the alphabet soup of the financial crisis? They were sliced, diced, fried and half-baked by City speculators, then given an AAA award by the rating agencies. We, the taxpayers, were cucumbered by the whole distasteful business. Now, of course, it's different. Or is it? Behind the latest billion-pound rogue trading incident we find that speculators are gorging on another acronym, the ETF.

This stands for Exchange Traded Fund, and they're marketed as a cheap way for "investors" (the sanitised word for speculators and gamblers) to profit from price moves in shares, gold, food and virtually anything else their "manufacturers" (makers of socially useless goods) wish to sell.

Today, the value of ETFs in circulation is around $1tr – about the same as half of the entire economic output of the United Kingdom. And they are, of course, triple-A safe, backed by rock-solid counterparties, etc – that is, until they go wrong.

It takes someone himself knee-deep in City trading to blow the whistle, so we have to thank Terry Smith, (above), chief executive of money broker Tullett Prebon. He has been a lone voice warning of the dangers of ETFs, and when it was revealed that the UBS incident was centred on trading in ETFs, he quite rightly issued a note titled: "ETFs: You were warned."

Some hedge funds have been "shorting" ETFs in trading "strategies" (ie bets) where the short is 10 times the value of the underlying ETF. Some ETFs are "physical" (they buy the item they're trading in) but others are "synthetic". That's another lovely word, like "derivative", which is used in the City to describe the more exotic gambling devices.

Smith is convinced ETFs have been mis-sold to the retail market, with the risks never properly explained. He doubts that even their manufacturers understand the risks.

UBS is big enough to absorb the huge losses it has incurred. But what if they were of a much larger magnitude, and affected a UK bank with a big retail arm? The answer, no doubt, is that the taxpayer would again be asked to pick up the bill for the financial gamblers.

Meanwhile, it's worth noting that HM Revenue & Customs, has decided to point its guns at private tutors. Evidently there's billions to be found among tax-dodging schoolteachers earning a bit on the side from extra lessons. But those wealth creators in the City? How dare they have to pay 50% tax on their hard-earned bonuses?

• My column last week on Tesco caused something of a stir. I reported how store bosses prevented me from writing down prices, which they told me was "illegal". Tesco went into damage limitation mode, tweeting and Facebooking that its customers were perfectly free to scribble down what they like. Quite how two store bosses could both misinterpret company policy is still a mystery. In the meantime, we're still keen to highlight the daft supermarket deals that prompted my price check in the first place. We want your pictures and stories of bulk buys that aren't and the half price deal that isn't. Send to And not just Tesco, please …

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