Talk:Arbitrage

Some recommendations

Good article, you might want to add that arbitrage is a counterforce for price discriminantion. It is often profitable for a company to price products differently in different markets. Arbitrage counteracts price discriminantion since the prices between the two markets tends to equalize as you buy more in the cheap area and sell in the expensive.

Also something about purchasing power theory might be good too since it is through arbritage that the relative purchasing power between countries is maintained.--ShaunMacPherson 11:06, 11 Mar 2004 (UTC)

This is an very good article. It might also benefit from a discussion of those who buy and sell companies, and make an arbitrage gain by moving assets from one company and putting them into another. For example, when you move assets from a private company into a publicly traded company, there is usually an immediate gain of 20% in the equity value. I did not want to edit this article to say that, as the author is clearly more of an expert than I am. --Kops2222 (talk) 13:37, 23 October 2009 (UTC)

Other types of arbitrage?

There's no doubt that people reading this article are looking for arbitrage primarily in stocks/currencies etc, but what about having a tiny section about other types of arbitrage, like in Internet Marketing? —Preceding unsigned comment added by 24.90.108.139 (talk) 20:56, 21 April 2009 (UTC)

Have you ever considered that many people might want to understand why all the lines at the supermarket are about the same? Signed, user Popemobile 1776 — Preceding unsigned comment added by Popemobile1776 (talk • contribs) 03:55, 21 November 2015 (UTC)

Regarding the amount lost by Long Term Capital

$100 Billion is an exaggeration.

True. The right figure depends on the time frame you use. Christofurio 00:16, May 27, 2005 (UTC)

Statistical advantage for casinos

There are a few casino games in which the odds are even, and sometimes in the player's favor. The casino still makes money off these games because gamblers usually do not play optimally and also because of the risk of ruin. An example of an even odds bet would be backing up the pass line at craps[1]. Some video poker machines give the player a slight advantage[2]. JHG 12:36, 23 September 2005 (UTC)

Hi JHG. You'd agree though that the casino has the advantage in a craps game overall? That was more my point but I concede that if all bettors went for the bet you note, the house wouldn't make any money. Neither would the bettors, of course ;-). I couldn't totally follow the stats on the Deuces Wild page (stats isn't my strong point). Are they convincing? Would every casino have this particular game? I'm not disputing your edit, but do you think it might be more reasonable to put "nearly always" rather than "usually", because the latter implies "sometimes do, sometimes don't", which is not the import of your argument, but rather "don't in every last particular". James James 11:02, 8 November 2005 (UTC)

First, the original comment seems to confuse an "even money bet" with "even odds". The pass line in craps is an even money bet (i.e., the payback if you win is equal to what you bet), but the probability that you win is less than 50%, so the house edge is greater than zero. As far as I know, any standard bet in craps is in the house's favour.

Certain video poker games really do offer a house edge less than zero, if they are played with perfect strategy. As JHG says above, they get away with it because most people don't play with perfect strategy. Even if everyone did, the bet sizes are small enough that you would do well to make minimum wage. The same might be true for certain blackjack games if the player counts cards (and that is what makes for all the legendary professional gamblers who get banned from casinos).

In any case, the article used to say "A casino usually has a statistical arbitrage in every game of chance played, even though it could lose money on any single game." I am not sure what that is supposed to mean. The casino could lose money on every game, over any period of time; it's just vanishingly unlikely. I changed that to "A casino has a statistical arbitrage in almost every game of chance that it offers," which I believe is meaningful and true.

Sports betting

'Sports arbitrage' is probably an established term but it's inprecise: bookmakers also offer odds on political, pop-culture and other events, some even on financial market events. I would call it 'Betting arbitrage' - I added an article on related practice, arbitrage betting, however it's far from being perfect yet. BTW, how can I make 'betting investment' and 'arbs' point to the same article?Adolg 11:27 18 October 2005, GMT

Long-Term Capital Management

"For example, it would buy U.S. Treasury securities and sell Italian bond futures. The concept was that because Italian bond futures had a less liquid market, in the short term Italian bond futures would have a higher return than U.S. bonds, but in the long term, the prices would converge. Because the difference was small, a large amount of money had to be borrowed to make the buying and selling profitable."

I am having some trouble understanding the above, can you please elaborate?

From what I understand. Italian bond futures have a less liquid market, in the short term Italian bond futures would have a higher return than U.S. bonds : Because Italian bond futures are cheaper they give higher returns than U.S. bonds. but in the long term, the prices would converge : Should you not be buying Italian bond futures instead? I'm sure I'm missing something. Can you please explain in some detail?

yes the example given does not make sense. nor does the categorization of the negotiated bail-out as "global macro arbitrage" ... that term has a specific meaning which is very different

Statistical Arbitrage

I've never heard this term before so I don't want to change it, but the definition that "statistical arbitrage is an imbalance in expected values" doesn't seem to be enough. Going long a risky asset and short a safe asset should not be labeled any kind of arbitrage just because of an imbalance in expected value. What seems important about the casino example is that risks are independent so the risk becomes 0 as the number of bets approach infinity (along with a positive expected value). Kyle J Moore 01:36, 15 May 2007 (UTC)

Controlled Substances section

I removed this section because I don't think it's really arbitrage; it's simply that 2 customers pay different prices for a product. It also reads like original research and is unsourced. Simishag 04:29, 14 June 2007 (UTC)

Removing linkspam

I have removed all but one external link. As far as I can tell they are all link spam for various reasons: clear advertising sites; informational sites that link to paid sites and read like business promotions; and a blog with an insubstantial discussion of something odd that may or may not have something to do with arbitrage. If anyone wants to add them back I would ask them to state clearly why their external link is relevant and not spam. I am not sure on Wikipedia's policy about linking to about.com articles and that article is reasonably helpful so I left that one in. Wikidemo 09:37, 23 June 2007 (UTC)

Definition of Arbitrage

The 3rd point seems wrong as the price of an asset should be discounted by a rate aproriate to the riskiness of the asset and not at the risk free rate always. — Preceding unsigned comment added by Student2k4 (talk • contribs) 06:30, 29 September 2011 (UTC)

Web Site Advertising arbitrage

OwenX deleted the section that I added to this article without any comment as to why in this talk page.
Would not manipuating the rules on a website, (such as Google), in order to take advantage of a lower priced add space, in order to make a larger profit be an example of arbitrage?
Apparently Forbes, a respected reporter of business news, seemed to think so in this article.
http://www.forbes.com/2006/12/06/internet-advertising-search-tech_cx_ag_1207google.html
If someone else can write a better synopsis of this, and add it to the article, please do.. OwenX ??

OwenX did at least make a note in his edit summary as to why he removed your addition. Although the source may suggest it is a form of arbitrage, my question is: is this notable? If there's but one media source that discusses it and establishes a link to arbitrage, then I'd hardly say that it's notable for inclusion in this article. I did think it was an interesting take but, I am slightly puzzled as to why Forbes was so quick to suggest it is a form of arbitrage. It's possible I'm missing something, but I don't see how the scenario (as described by your written addition to the article) meets any of the conditions for arbitrage. John Shandy` • talk 22:06, 18 February 2011 (UTC)

There is a difference between arbitrage and acting as a middleman, which is what the Forbes article is referring to. Key differences here: 1) The activity described in the article is an enterprise that takes work to sustain (running servers, identifying keywords, etc). 2) At no time is a risk-free profit created: there are 2 distinct steps, the "arbitrageur" must pay for the first ad before he can sell the second one and the sale of the second is not guaranteed. It has become trendy for news sources to report this sort of middleman activity as arbitrage, but that is not the traditional financial meaning of the term. Simishag (talk) 23:13, 18 February 2011 (UTC)

I do appreciate the clarification. However, in this scheme, these enterprises are assured of the second ad sale because they already control the ads they will place. The arbitrage comes because they are "bidding low" by using the loopholes in the system to snag lower cost single ad positions, and then "selling high" by using these positions to point users to alternate websites that host multiple higher-profit advertisements. And "risk free profit is being made, (as long as the web-geniuses in the enterprises can continue to elude efforts to close the loopholes). Looking at the definition in paragraph one of the article, that seems to be arbitrage. As to this being notable, I know that traditional business tends to downplay the role of web-based business. We are talking about billions of potential dollars changing hands as this trend spreads from Google, YouTube, and Facebook, (online businesses that are already notable), to every website that hosts any kind of advertisement.

Please sign your comments using 4 tildes (~). From the Forbes article:

• Take an example from the online market for asbestos-related cancer lawsuits. A Web page arbitrageur can buy a misspelling of mesothelioma like “mezothelioma” for just nickels per click. The arbitrageur’s ad then appears next to the results for that search term. Google users who click on the ad are led to the arbitrageur's site, which is stocked with more lucrative ads for attorneys and cancer treatments. For those links, the arbitrageur might be paid as much as $25 per click.

There is no guarantee that the user clicks on the second link. If the user clicks on "mezothelioma" but not "mesothelioma", the middleman loses a nickel. Clearly the middleman does not need many people to click the second link to make money, but that's not really the point; there is still some risk, however small. In fact, in the past, DDOS attacks have exploited this risk. An attacker simply hits the first cheap link over and over, while never hitting the second link, consuming the entire advertising budget while never generating any revenue. This discussion also ignores the capital investment that the middleman has to make to get this off the ground. The middleman has to spend time and resources to identify these misspelled keywords and create sites to take advantage of the situation. This may be small but it is not zero.

Arbitrage is about exploiting a price difference between markets where the asset is identical in each market. There are standardized formats for many assets, because an ounce of gold in a bar is not the same as an ounce of gold in a coin, and neither is the same as an ounce of gold in a necklace. The keywords "mesothelioma" and "mezothelioma" are likewise not identical assets. Simishag (talk) 04:26, 20 February 2011 (UTC)

Oil-storage_trade contango

It seems Oil-storage_trade and contango should be prominently mentioned in this article, as they are some of the most important everyday examples. Any reason why they're left out? — Preceding unsigned comment added by 70.124.70.178 (talk) 04:36, 18 March 2013 (UTC)

"Zero cost"? How?

The article introduction says: "in simple terms, it is the possibility of a risk-free profit at zero cost."

How is it zero-cost? You need money to buy the product at the low price, only then you can sell it at the higher price. I found this confusing. -- Jorge (talk) 18:28, 16 October 2013 (UTC)

You can think of it as zero net-cost. So consider the entire series of trades as a single investment (possibly over time, possibly simultaneously). Zfeinst (talk) 19:06, 16 October 2013 (UTC)

But in that sense, wouldn't every investment be zero net-cost? Can you give an example of an investment that has non-zero net-cost? -- Jorge (talk) 19:13, 16 October 2013 (UTC)

Any self-financing portfolio has zero net-cost. Zfeinst (talk) 20:03, 16 October 2013 (UTC)

I agree that this is poorly worded. "risk-free profit with zero net value-at-risk" might be a better choice, but I'm not really sure. Simishag (talk) 22:37, 16 October 2013 (UTC)

"Risk-free" and "zero net value-at-risk" essentially mean the same thing. I reworded the "cost" phrase for clarity. Some costs (e.g., exchange fees) are often associated with arbitrage, but they are lower than the gross profit from the transaction. Owen× ☎ 23:06, 16 October 2013 (UTC)

Actually it could be written completely as just "risk-free profit" since profit = revenue - cost. How do you feel about changing the statement to only say "risk-free profit"? Zfeinst (talk) 23:16, 16 October 2013 (UTC)

Well, it's still necessary to have some capital to execute the trades. Arbitrage theory generally assumes that the capital is (ultimately) not at risk. But "risk-free profit" alone sounds like picking up a dollar found on the sidewalk. Also, the amount of capital available directly affects the amount of the profit. It may affect the return percentage as well as interest/margin rates are affected by the amount of capital posted. TL,DR: capital is required. Simishag (talk) 00:03, 17 October 2013 (UTC)

Most arbitrage trade are instantaneous - two or more legs of the trade are executed simultaneously, after which the trader has no open positions, just a net profit in cash. Therefore, no capital is used for such trades - the trader only acts as a conduit between other participants, never holding any of the assets at any moment. In some cases, margin is required by the exchange to complete the transaction, but there's no direct cost associated with margin - it is usually provided by other assets held in the account, typically T-Bills. There is no net cost associated with holding T-Bills, since the yield they pay is, by definition, equal to the cost of short-term cash, although we could arguably discuss the opportunity cost versus other asset classes.

As for Zfeinst's suggestion to remove the cost phrase from the lede - sure, sounds like a good idea. The issue of cost is discussed later in the article in greater detail anyway. Owen× ☎ 01:45, 17 October 2013 (UTC)

Perhaps it's called "capital", perhaps it's called "margin", but as you noted, some assets are required to engage in these transactions. I can't just go to a broker and make a couple of orders and have them say "well it's an arb, so hey, no worries, here's your money and have a nice day." Maybe the need for assets of some kind is so obvious that it doesn't need to be discussed in the lede but again, this is not the same thing as finding free money. Simishag (talk) 00:06, 18 October 2013 (UTC)

The question is not whether any assets are needed to complete the transaction, but whether any costs are associated with having to own those assets. As I pointed out, while there is a cost associated with holding cash, there is no cost associated with holding many other assets, including those most commonly held as margin to facilitate arbitrage trades. Therefore, regardless of whether you call it "capital" or "margin", it does not constitute part of the cost of conducting arbitrage. Owen× ☎ 20:37, 18 October 2013 (UTC)

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The ideas of using multiple discount rates...

Could someone who knows please look at the sentence "The ideas of using multiple discount rates obtained from zero-coupon bonds and discount a similar bonds cash flow to find its price is derived from the yield curve" and perhaps say whatever it means a little more clearly? Thanks --Frans Fowler (talk) 23:17, 17 January 2017 (UTC)

Uncited material in need of citations

I am moving the following material here until it can be properly supported with reliable, secondary citations, per WP:V, WP:NOR, WP:IRS, WP:PSTS, et al. Nightscream (talk) 21:08, 5 December 2017 (UTC)

Examples

• Supposing an exchange rate (after taking out the fees for making the exchange) in London is £5 = ¥1000 and the exchange rate in Tokyo is ¥1000 = £6, converting ¥2000 to £12 in Tokyo and converting that £12 into ¥2400 in London, would result in a profit of ¥400. In reality, this arbitrage is so simple that it almost never occurs. But more complicated foreign exchange arbitrages, such as the spot-forward arbitrage (see interest rate parity) are much more common.
• One example of arbitrage involves the New York Stock Exchange and the Security Futures Exchange OneChicago (OCX). When the price of a stock on the NYSE and its corresponding futures contract on OCX are out of sync, one can buy the less expensive one and sell it on the more expensive market. Because the differences between the prices are likely to be small (and not to last very long), this can be done profitably only with computers examining a large number of prices and automatically exercising a trade when the prices are far enough out of balance. The activity of other arbitrageurs can make this risky. Those with the fastest computers (i.e. lowest latency to respond to the market) and the most expertise take advantage of series of small differences that would not be profitable if taken individually.
• Economists use the term "global labor arbitrage" to refer to the tendency of manufacturing jobs to flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialization. At present, many such jobs appear to be flowing towards China, though some that require command of English are going to India and the Philippines. In popular terms, this is referred to as offshoring. (Note that "offshoring" is not synonymous with "outsourcing", which means "to subcontract from an outside supplier or source", such as when a business outsources its payroll or cleaning. Unlike offshoring, outsourcing always involves subcontracting jobs to a different company, and that company can be in the same country, even the same building, as the outsourcing company.)
• Sports arbitrage – numerous internet bookmakers offer odds on the outcome of the same event. Any given bookmaker will weight their odds so that no one customer can cover all outcomes at a profit against their books. However, in order to remain competitive they must keep margins usually quite low. Different bookmakers may offer different odds on the same outcome of a given event; by taking the best odds offered by each bookmaker, a customer can under some circumstances cover all possible outcomes of the event and lock a small risk-free profit, known as a Dutch book. This profit will typically be between 1% and 5% but can be much higher. One problem with sports arbitrage is that bookmakers sometimes make mistakes and this can lead to an invocation of the 'palpable error' rule, which most bookmakers invoke when they have made a mistake by offering or posting incorrect odds. As bookmakers become more proficient, the odds of making an 'arb' usually last for less than an hour and typically only a few minutes. Furthermore, huge bets on one side of the market also alert the bookies to correct the market.
• Exchange-traded fund arbitrage – Exchange Traded Funds allow authorized participants to exchange back and forth between shares in underlying securities held by the fund and shares in the fund itself, rather than allowing the buying and selling of shares in the ETF directly with the fund sponsor. ETF trade in the open market, with prices set by market demand. An ETF may trade at a premium or discount to the value of the underlying assets. When a significant enough premium appears, an arbitrageur will buy the underlying securities, convert them to shares in the ETF, and sell them in the open market. When a discount appears, an arbitrageur will do the reverse. In this way, the arbitrageur makes a low-risk profit, while keeping ETF prices in line with their underlying value.
• Some types of hedge funds make use of a modified form of arbitrage to profit. Rather than exploiting price differences between identical assets, they will purchase and sell securities, assets and derivatives with similar characteristics, and hedge any significant differences between the two assets. Any difference between the hedged positions represents any remaining risk (such as basis risk) plus profit; the belief is that there remains some difference which, even after hedging most risk, represents pure profit. For example, a fund may see that there is a substantial difference between U.S. dollar debt and local currency debt of another country, and enter into a series of matching trades (including currency swaps) to arbitrage the difference, while simultaneously entering into credit default swaps to protect against country risk and other types of specific risk.
• A fairly trivial example is the melting of coins when their scrap metal value exceeds their facial value. This practice is usually forbidden.

Crypto arbitrage

There have been a number of edits/reverts regarding crypto arbitrage lately. Some consensus on the appropriate discussion should be provided. It is not clear to me if there is anything specific to arbitrage for crypto compared to other spacial arbitrages. If there is something distinct, then this should be provided and include citations. If there is nothing distinct, I propose this subsection be deleted. Zfeinst (talk) 08:09, 14 June 2024 (UTC)