Trader leaves Swiss UBS with £1.3m hole as banks face eurozone debt exposure

A City trader was being questioned last night on suspicion of committing the largest fraud in the history of the Square Mile after the Swiss investment banking giant UBS announced that unauthorised transactions have left it nursing a loss of £1.3 billion.

Kweku Adoboli, 31, was arrested by City of London Police at 3.30am yesterday at an unnamed office building thought to be UBS's City headquarters.

Ten days ago, the specialist equities trader had delivered a potential hint of rapidly growing losses when he wrote on his Facebook page: "Need a miracle." The detention of Mr Adoboli on suspicion of acting as a "rogue trader" came on a day of further turmoil about the exposure of the world's banks to eurozone debts and coincided with the third anniversary of the collapse of Lehman Brothers.

It will also add to calls for the strengthening of plans announced this week to place a firewall between "casino" investment banks and their retail arms.

In a case which also had disturbing parallels with that of Jérôme Kerviel, whose unauthorised trading cost the French bank Société Générale £4.3bn in 2008, UBS stunned the markets when it released a statement before 9am saying it had discovered losses of $2bn (£1.3bn) "due to unauthorised trading by a trader in its investment bank". UBS shares fell by more than 7 per cent after the news.

The company, which Mr Adoboli joined as a trainee five years ago, said last night that it was still investigating the full extent of the damage and what caused the staggering losses.

Since joining UBS in March 2006 as a trainee investment adviser, Mr Adoboli had developed an expertise in complex financial instruments called exchange-traded funds (ETFs) and a little-known trick of the investment banking trade known as the Delta One business, which can make vast sums from tiny fluctuations in the value of an asset or product.

But like Kerviel, Mr Adoboli had also acquired experience in the back office of his employer, working as an analyst to explore the minutiae of the trading niche for which he later became one of UBS's four "market makers".

If it is proved that the London-based financier committed fraud, it is possible this deep knowledge of his bank's procedures allowed him to conceal any snowballing losses.