back to article Why do these traders get billions to play with, unchecked?

One of the most misunderstood concepts in all of finance is that of “arbitrage”. It looks very much like speculation from afar but it isn't, it's very much the opposite. There are also a lot of people who describe what they do as arbitrage and they're damned liars: they're speculators. Ivan Boesky used to claim to be an …


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  1. Anonymous Coward
    Anonymous Coward

    Here's one for the common man

    Tesco is selling gold jewelery at less than the bullion value (London Fix) of the gold in it.

    They don't actually advertise this, and probably don't even realise it, but I bought a 9 carat gold bracelet from them for £27, which when weighed came to 2.1 grams. That contains 0.7875 grams of pure gold, which at £1145 a troy ounce is worth £28.99. Plus you get a nice presentation box.

    So I bought four more.

    They are still available:

    Buy two and use the voucher code TDX-KLH4 to get an additional £10 off. Also collect from store to avoid the £5 shipping charge.

    1. Marky W


      And just how exactly are you going to realise this gain? I suspect you're going to feel a bit of a mug when you pop into Cash Converters and they explain that the rates they offer don't *quite* match the international bullion markets...

    2. Steve the Cynic
      Thumb Down

      Simple question...

      How do you propose to extract bullion-quality gold from these bracelets without paying more than the price discrepancy? (Note: the cost you'll have to pay includes the assaying necessary to get it marked as really bullion-quality.)

    3. Anonymous Coward
      Anonymous Coward

      Nice if you can sell it at London Fix, the best price I can find is £27.93 for 2.1g. Still seems a fair deal though with the discount, thanks for the tip!

      1. Anonymous Coward
        Anonymous Coward

        "Nice if you can sell it at London Fix" et all

        Fair enough that it isn't truly arbitrage if you don't realise the gain instantly with a corresponding deal. However, my method of releasing the value involves an intrinsically long-winded transaction. If you don't actually know five girls, this may not work out for you (or just buy one or two).

        1. Heironymous Coward
          Paris Hilton

          long-winded transaction?

          Maybe you're not talking to the right girls ;-)

    4. Annihilator

      You're also forgetting

      Clubcard points! I reckon you've found a way to bring down Tesco, nay, the world economy!

      1. Anonymous Coward
        Anonymous Coward

        Clubcard point

        Yes, I get clubcard points, and I link through to Tesco Direct via TopCashback for about 3% more discount, plus I pay with My Nectar credit card so I get Nectar points too.

        But that would have made the first post a bit lengthy.

        1. Annihilator

          re: Clubcard points

          I think you missed my sarcasm. The price you've quoted for bullion gold takes into account what it costs to turn regular gold into certified bullion gold along with a multitude of other factors.

          In short, 9ct gold does not have a value 37.5% of bullion gold.

          1. Anonymous Coward
            Anonymous Coward

            re: re: Clubcard point

            Yeah, sarcasm is hard to get across- I took your post as a rather lighter form of humour.

            As a jeweler, I actually used to pay MORE for carat gold than the bullion value of the contained gold, when buying it as a raw material. And the people who bought it from me subsequently (in jewelery form) paid a lot more. Shop markup on my prices was normally 100%. Purchase tax in those days was 35%.

            Buying gold as jewelery is a traditional form of savings in some cultures, despite the swingeing markup. This Tesco deal lets you buy at the actual gold value (actually a little less). The article should be worth more than the metal content when you go to sell, just don't insist on selling at scrap value- sell it as a gold bracelet.

            There are many ways to invest in gold other than laying up .999 bars. Some people prefer coins, which trade at a premium over their gold content, even though they are often not pure gold. In the coin market, many people prefer to trade silver coins rather than bullion, because silver bars attract VAT on the whole value, whereas trades in coins attract VAT only on the trader's markup (there is no VAT on gold bullion or coins, but there is on jewelery of course).

    5. PyLETS

      transaction costs and Tobin tax

      The reason arbitrage as described in the article works is that the arbitrageur pays almost nothing to buy and sell in 2 markets simultaneously. This never applies to real stuff, like gold bracelets for reasons stated in other responses. It only works on electronically tradable virtualised securities, until governments decide collectively to introduce the Tobin tax on such trades. Doing that would force speculators to take a long enough view of something to help the change in value to be more real as opposed to short-term and psychological, and it would limit arbitrage to situations where the price difference is big enough to pay the Tobin taxes on the simultaneous deals.

  2. Marky W
    Thumb Up

    Nice post

    Very interesting. Thanks!

  3. Steve the Cynic

    Boesky did arb...

    Arbitrage is normally done at the same time between different markets, but can also be done between different times in the same market. If I know something the market does not, I can reliably predict the future price of something, or at least the direction of change. So I can arb between the price now and the price in the future. There is a tiny risk, of course, in the sense that maybe the market knows more than I think about the item, but there is also risk in cross-market arb, in that the price might move sooner than I thought, and in the wrong direction.

    What Boesky did *was* arbitrage in this sense, but he used inside information to gain that knowledge advantage, and that was ultimately his undoing.

    1. Vladimir Plouzhnikov


      "So I can arb between the price now and the price in the future."

      No, you can't. When you do that you are taking a position. The arb implies that you have no overall position.

      Depending on how exactly you are doing it you may speculate on outrights (the highest possible risk) or on time-spread (usually considered lesser risk but all depends on which particular markets you are talking about).

      If you are talking about commodities you can use the strategy you mention to hedge your equal but opposite position in the physical goods but even then it is not an "arb". Normally such things are known as "contango plays" - when the forward curve is going up sufficiently steeply, you can buy your physical goods now, place them in storage and sell futures for the same quantity, say 3 months forward. If the contango is large enough to cover your financing and storage costs you will make money.

      But even in that case there are still risks involved, higher or lower depending on whether the futures you used are deliverable or financially settled, whether your goods are of exactly the same quality, same location as the futures delivery basis etc etc.

      1. Mark 65

        Re: Nope

        I wouldn't really call BT traded in London versus NY arbitrage as you are, say, short an NY stock and long a London one. You may have locked in this price differential but at some point you need to close out unless the NY share is fungible with a London one. Otherwise you are carrying fx risk until you close out.

        A better definition of arbitrage is the future on an index being a function of the index and borrowing/discount rates. Even then risk-free is only theoretical as you have execution risk - the ability to get both sides of the trade on at the prices and in the sizes you need. Due to this prices vary by an amount reflective of this and the ability to borrow cheaply (close to the "risk free" rate)

        A lot of what is listed as arb these days is just big basis risk due to playing around with proxies (gold mines/shares vs bullion) as true arb opportunities are thin on the ground.

    2. DJ Smiley

      Or you could call it what it is...

      Which is speculating...

      Hes speculating the price would rise/fall - You don't *know* as it hasn't yet.

    3. Bronek Kozicki
      Thumb Down

      "If I know something the market does not"

      that's called "insider trading", not "arbitrage"

  4. Jon Bright

    Arbitrage isn't entirely risk free

    Arbitrage also tends to boil down to a big game of "who's fastest?". Say I've noticed that I can buy BP shares in New York for the $38.50 and sell them in London for (the equivalent of) $38.52. I send off my orders to New York and London at the same time. Unfortunately, whilst I'm doing that, someone else sells to the person in London who's offering $38.52. Now that they've done that, the best price available in London is now $38.49. My order in New York gets executed fine, but I'm now left with a bunch of BP shares that I can't sell for the same price I bought them for, never mind for a profit.

    There are ways and means of trying to deal with this and similar risks, but none of them are perfect.

    This kind of risk is fairly small, but it's nevertheless not true to say that arbitrage is risk-free.

    1. Vladimir Plouzhnikov

      "This kind of risk is fairly small, but it's nevertheless not true to say that arbitrage is risk-free."

      This is an execution risk and you run it *before* your arbitrage is "locked". After that you should be risk-free or you cannot call it "arbitrage".

      But note that buying the same product in one market and selling it on another is not risk-free unless you can move your product from one market to the other to liquidate your trade. If that is not possible then you are still exposed because you will have to liquidate your positions in each market separately and the spread between them may move against you - so it's not a true arbitrage.

  5. sandman

    Great article

    I once had the pleasure (ahem) of working on training courses for the New York Stock Exchange an rather wish some of the writing on those had been as clear and succinct!

    1. DJ 2
      Thumb Up

      Yeah, Finance is obsfucated to try to make it sound like a mystical art.

      1. relpy
        Paris Hilton


        I believe obfuscation is buried somewhere in the definition of Profession. It may not be explicit so possibly it would be best to ask a lexicographer.

        Paris, who isn't obfuscated in the slightest.

        1. Mark 65

          Obfuscation, acronyms and other ways of sounding smart

          Paul Wilmott does a good job of debunking the bullshit and I would certainly recommend his "introduces quantitative finance" series

      2. Ru

        "obsfucated to try to make it sound like a mystical art"

        I could say the same of medicine, law, or dare I say it software engineering...

  6. deshepherd

    There was an item on the R5 "wake up to money" program last week (n.b. I listen to the podcast - I'm not awake at that time of day!) about a company that was laying a new dedicated cable across the atlantic for a finance company ... by having their own direct transatlantic connection they reckoned that they'd get data between NY and London 10ms faster than at present and that for every ms gained they thought they'd get a return of something like $100million. So speed definitely is important!

    1. Anonymous Coward
      Anonymous Coward

      Too right.......

      I work for a very large telco providing very fat pipes for most of the worlds major trading houses and the thing that upsets them most if there is a fibre cut is not the 50ms time it takes to switch to the protection path but the 5 - 20 ms increase in latency!

      These brokerage firms are often some of the fastest ways we find out there has even been a fibre cut somewhere in the network because they'll raise a trouble ticket because of a latency increase before the network monitoring center ever pick it up (it being just 1 more blinking alarm in hundreds of thousands of other alarms!)

      Anon, obviously

    2. Ken Hagan Gold badge

      I'm told that those trading in New York can connect either over the internet or by having their automated trading systems in a rack at the stock exchange. The latter gives an advantage and therefore you pay big bucks for a rack. I'm also told that some European exchanges forcibly add random delays to transactions in order to avoid this problem.

      Perhaps some IT specialist needs to teach the bankers about race conditions.

    3. proto-robbie

      Have they looked at neutrino beams?

  7. Mike Bell

    Please Help

    Nice article.

    I confess to being a bit of a nitwit when it comes to economics, and I can't get my head round the following:

    With all these hot-shot traders moving stuff around at breakneck speed, and making a handsome living at it, surely for every top dog killing there's a numpty who's made a loss? If so, where are all the fallen?

    1. DJ Smiley
      Thumb Up

      I presume those are the ones who didn't trade fast enough and are left with billions of pounds worth of stock, brought at higher prices than its now selling for.

    2. Anonymous Coward
      Anonymous Coward

      It helps to not consider that the world economy as a balanced equation. If we froze the world now, the banks, the assets, the debts, etc, and settled everything, it would not return to zero, or even the "value" of the assets.

    3. IDC

      Got a pension fund - that'll be you. Any savings - same deal. The real distinction isn't between retail and investment banks but between banks that offer real products and services into the real economy and the arbitrageurs, hedge funds and so forth who do nothing for anyone but them selves. That explains the rewards that are so unconnected to the real world. The competition isn't to provide those goods and services, it's to find the sharpest dealers, the smartest quants, the crookedest tax lawyers and so forth. And all the while anyone who operates honestly in the real economy is being robbed. Bring on the Robin Hood tax, the Tobin tax, whatever you like to call it. A very small percentage would still throw enough sand in the works to stop these shenanigans.

      1. Mark 65


        Arbitrage is valid work. Look it up if you don't believe.

    4. Vladimir Plouzhnikov

      Not a zero-sum game

      Not only the economy as a whole is not a ZSG but also each market on its own isn't either.

    5. Anonymous Coward
      Anonymous Coward

      "Die im Schatten..."

      > where are all the fallen?

      No longer taking part in the general discourse, becoming - at best - part of a statistic no one is interested in.

      That's why the current turbo-capitalism looks so good: Winners only.

      " There are some who are in darkness

      And the others are in light

      And you see the ones in brightness

      Those in darkness drop from sight "



    6. wayne 8

      If you don't know who the mark is...

      then It is you.

      Said of poker games. Analogy of markets, where the little fish with IRA and 401K (or the UK equivalents) assets are called upon to cough up money for the professionals. The little fish think they swimming with the sharks and the little fish are getting a little food, but there comes a day when it's shark feeding time.

      The depiction of a bookmaker is not incidental. There exists leveraged ETF's for both sides of an index, long and short. The firm makes money up or down, uses the losers money to pay the winners, pockets administrative fees and the fractional losses in daily volatility. Check out FAS and FAZ on NY market. Bookmaking, but it is "financial" and not sports betting, so it is legal in NY.

  8. Filippo Silver badge

    Very nice article. It explains something interesting in a very understandable fashion. Well done!

  9. Anonymous Coward
    Anonymous Coward


    Great article! But I have spotted a flaw in your analysis -

    You describe the process of arbitrage in a way that is mathematical and involves rational calculations and assessments, implying that these positions are primarily staffed by responsible, intelligent people.

    The reality to most people who know traders is that they are cocky, arrogant, ham-fisted cretins, too high on coke and strippers to remove their heads from their rectums far enough to even look at anything approaching a rational calculation.

    1. Tim Worstal

      Entirely true

      But then that is the way it is supposed to work. Arbitrage should be a matter for the quants, risk taking for the traders.

      That it often isn't is one of the problems that finance has managed to get itself into.

      1. nyelvmark
        Thumb Up

        Ah, something I can upvote.

        But why don't all Register articles have a "rate this article" feature? Some of the "Reg Hardware" and "Channel Register" etc. articles do, but the front-page articles don't.

        Anyway, thanks for an excellent article, Tim Worstall.

      2. nyelvmark

        Oh, wait...

        Is "Tim Worstal" "Tim Worstall"?

    2. Ru


      All the traders I've ever met have been cocky and arrogant, certainly, and who doesn't appreciate coke and strippers? (well, maybe those who prefer hands-on entertainment...) but I certainly wouldn't call them ham-fisted or transanocephalous.

      If they've accomplished anything at all, it is because underneath it all they tend to be at least moderately capable. They wouldn't ever get anywhere if they weren't, and those hookers don't come on credit you know...

  10. Apocalypse Later


    Not long ago you could buy oil on the spot market at one price and sell it on the futures market at a higher price. The deals went through at the same time, but then you had to hang on to the oil somehow until the date for the future delivery. They had tanker ships steaming in circles for a month.

    1. Anonymous Coward
      Anonymous Coward


      Oil AMD commodities in general are unique in that the future price can be less than the current. The reason i believe being the risk that you cannot deliver the goods - other futures being cash settled. This risk of non-delivery comes and goes giving rise to contango and backwardation situations.

  11. Anonymous Coward
    Anonymous Coward

    "surely for every top dog killing there's a numpty who's made a loss? If so, where are all the fallen?"

    Probably our pension funds!

  12. The Man

    Nice article but many facts simply wrong

    "A bookie will always have a balanced book: whichever horse comes in, the house wins (same with casinos). "

    Having worked for a major FTSE bookmaker for many years your bookmaker (and casino) analogy is quite simply totally wrong. Bookmakers in reality about 99.99% of the time never have a balanced book on an event, it's where the expression 'the bookies took a beating on that one' comes from.

    To be correct you should have said "Despite bookies almost never having a balanced book on an individual race they price the available odds to ensure that they have a long run 'edge' built into all their books to ensure a long run profit margin, however significant day to day volatility can see the daily margin swing wildly from negative to positive numbers"

    For example lets say I price my horse race to have an overround of 10%, in English that means that I've basically moved all the odds down such that I have a 10% mathematical advantage(the overround) in the book. If (AND IT'S AN ENORMOUS IF) £100 is distributed across all the horses in the race as per the actual underlying odds I'll have my balanced book andf make £10 whatever the outcome.

    However life's not like that in reality, about 60% of the money ends up on the favourite and about 40% on the rest of the field. So if the favourite comes in what tends to happen is that the bookie actually truly, really loses money on that one race and the books 'actual' margin goes negative usually to something like -20%.

    Howveer lets say the favourite goes down at the first fence, the bookie then makes out like a bandit and gets a margin of +say 40%, on that race.

    Over many races the ups and downs smooth out and most bookies tend to target a horse racing margin of around 15% over the long term.

    It's a much misunderstood area and requires bookies to be very careful about their own risk hedging, there's always a potential daily loss limit that will be tolerated before the bookie himself starts hedging off (usually back onto Betfair or between each other).

    It's worth noting that the Tote system works differently as it uses the weight of money on each horse itself to calculate the underlying odds and then takes a rake from the pot of money as it's fee.

    The Tote has no risk from the race itself as it's fee is independent of any combination of outcomes (ignoring cancellations, Acts of God etc.), but it's not balancing it's book as technically it's not operating a 'book'

    Arbitrage is also not totally risk free as you describe, there's a risk that your buy and sell orders don't execute properly, liquidity is not sufficient to cover one side of the trade or the other, counter party risk etc. etc..

    Arbitrage can be very low risk but it's not NO RISK.

    Hope that helps some people.

    1. Anonymous Coward
      Thumb Up

      @The Man

      nice! thanks

    2. dirgegirl

      The hobby horse won THAT race

      To be fair, if Tim had written up his bookie analogy to that level of detail, I'd not have made it to the end of what was an excellent article.

      1. Anonymous Coward
        Anonymous Coward

        Good point - the bookie analogy is a simplification and omits the crucial factor that he cannot change his odds retrospectively. let's suppose that he has taken some bets at 10-to-1 on a horse, and there is a rush of money onto that horse just before the start. He cannot whack the odds down to evens to cover his previous exposure, well not unless all his bookie chums do the same - but then large adjustments generate all manner of instabilities. So, he has to ride-out the ups and downs, to take a real position on the race, and in reality he is a speculator, albeit a reasonably well-hedged one.

        Excellent Article notwithstanding.

        1. Ian Johnston Silver badge

          I thought SP odds did change for precisely this reason, while AP stay the same once the bet is placed. Or at least that's what I've gathered from Steggles behaviour in "The Great Sermon Handicap"

      2. The Man

        Probably true but the betting market offers some really intriguing insights into how much of the economic theory used to build trading models is probably totally wrong.

        For example: Everyone knows that potential reward rises in line with risk right? It's a key component of efficient market theory and is used practically in how credit card APR's are set, mortgage rates etc. etc.

        Well in the betting markets it's completely the inverse for the market participant (read trader)

        I'll give you an example: Say there are two blokes who know absolutely nothing about horses. Each starts with £1m and bets on every single race over the year such that they've wagered the full £1m over lets say for argument 100,000 races so volatility will be significantly smoothed out.

        Bloke 1 only ever backed the favourite or joint favourite

        Bloke 2 only ever backed the longest priced horse in each race.

        At the end of the year Bloke 1 will have left of his £1m about £950k

        At the end of the year Bloke 2 will have left of his £1m about £200k or even less.

        Why is this? Both will have less than they started with due to the bookie's overround but why the difference?

        Basically bookies price the favourite at a lower expected margin than long shots (usually only 3-5% off the underlying mathematical odds), so your 1/1 favourite is probably actually about that, whereas that 100/1 long shot is actually realistically about 200/1 or longer.

        The bookie doesn't price it longer as you don't attract any more money as the elasticity is too low so what's the point.

        You could say betting markets are an anomally and financial markets are different but I very much suspect not.

  13. Apocalypse Later

    This space deliberately left blank

    The original Ponzi scheme was ostensibly arbitrage. Carlo Ponzi had noticed that you could buy international postal reply coupons in Italy for much less than their value in postage when used in the USA, and claimed that he had a method of redeeming them for this value rather than using them as they were intended. He found there were difficulties in performing this trick in practice, but the logic of it convinced many investors to give him their money, and he paid early investors from the funds coming in from later investors, the classic Ponzi scheme manipulation.

  14. Tom 7

    Hedging is all well and good

    but when your hedging is in reality buying insurance from a company that's based on your value it means nothing. This I'll scratch your back if you'll scratch mine approach doesn’t do a lot of good for the economy when both of you are up to your necks in the same swamp - even if it does seem to baffle politicians and regulators.

    This stuff is remarkably easy to simulate on computers - but the models show that when the economy contracts it all goes to hell in hand cart the models are deemed wrong. The fact they actually show reality rather than the wishful thinking of economists is their downfall.

  15. Jim 59


    Arbitrage and trading are just activities aimed at profiting from price fluctuations. They are socially useless activities with a zero sum gain. It sounds harsh, but a roadsweeper contributes more to worldwide society than the poshest of posh city traders. He delivers clean streets. They deliver, they contribute, nothing, net. They generate no wealth and add no value. And any tax they pay is just tax that was lost elsewhere.

    1. Vladimir Plouzhnikov

      Oh really?

      "Arbitrage and trading are just activities aimed at profiting from price fluctuations. They are socially useless activities with a zero sum gain."

      In your socialist fervor the words are flying right out of your arse...

      Arbitrage mops up inefficiencies in the markets.

      Trading (I presume you mean speculative trading) brings information about supply and demand to the market, adds liquidity and absorbs risk from those who need to reduce their exposure (e.g. your manufacturers and end users).

      Just because you don't know what something is for don't necessarily means it is not important for your life.

      And of course you completely ignore that any business (your baker, your bank, your grocer) which pays taxes which pay salary to your street sweeper only works by taking risks (what is known as "speculation").

      1. Anonymous Coward
        Anonymous Coward

        "Arbitrage mops up inefficiencies in the markets."

        "Exploits" rather than mops up.

        "Trading (I presume you mean speculative trading) brings information about supply and demand to the market, adds liquidity and absorbs risk from those who need to reduce their exposure (e.g. your manufacturers and end users)."

        This is a bit of a rose-tinted version. In fact trading does do these things but it also introduces risks and can distort markets by playing on fear or fashion or any number of irrational factors so as to remove funding from areas of the market which have utility and send it to areas which are frivolous or even imaginary. Someone always benefits from these things but there's no guarantee that society as a whole or the deserving or basically anyone in particular will benefit. It's all just a case of rolling dice and, every couple of decades or so, it all goes violently tits-up and causes a huge amount of damage.

        Whether the damage is covered by the benefits generated in between crashes is not at all clear either way. Free markets ("free" in the real sense, not just the silly free-marketeer sense of free from governments) are mathematically unstable and it takes a considerable amount of effort and intervention by governments to prevent the whole thing collapsing. In that sense, the stock market is really a socialist construct under heavy disguise (rather like the US army). When governments back off from regulation it inevitably runs straight into the ground leaving a large crater filled with the remains of real people's lives.

        Like communism, capitalism works as long as you don't allow real people to touch it and leave it on the page where it at least looks nice.

        1. Vladimir Plouzhnikov

          You are mistaken


          In an efficient market risk-free profit should not exist. In reality, due to inefficiencies it sometimes does exist. Arbitrageurs "exploit", as you say, these inefficiencies but by doing so they raise the price in the markets where they buy and lower it where they sell - thus closing the gap and removing the effect of the inefficiency.


          It is now fashionable to blame trading for increasing volatility. What it is doing though is bringing information to the market (and that information may be real or perceived but in combination it is the best that can be achieved) and so facilitates price discovery. The short term effect may indeed be increased volatility but for longer periods it actually smoothens the price.


          What you mean by regulation and what the majority of politicians in the world mean by that word is licence to manipulate prices to achieve their politically expedient goals.

          The real purpose for market regulation is to provide a level field for all participants and *protect* the markets from manipulation by strong players.

          If you distort the market by artificial signals or restrictions it become unstable and will tend to move towards its equilibrium value rather than away from it. When the false signal stops the market snaps back to its real price. That's what happens when governments can no longer support their manipulative price input by force.

          1. Anonymous Coward
            Anonymous Coward

            True but

            It means that the model is flawed in the real world, requiring such external actions.

            This is a costly way to create liquidity and price convergence. Short term price discovery is not valuable, except for profiteering, unless the trades are purely analytical.

            These should be fully automated and run by regulatory bodies as it corrects flaws, and can add to govt coffers.

            1. nyelvmark

              ...and can add to govt coffers.

              Right. We're all in favour of that, innit?

              1. Anonymous Coward
                Anonymous Coward


                they're going to waste the money anyway, might as well be coming from an activity like arbitrage that so long as it is done, no one except the bankers would miss..

        2. nyelvmark


          >> Free markets ("free" in the real sense, not just the silly free-marketeer sense of free from governments)

          You seem to be under the impression that free markets exist because there is some authority somehere that says they should. Free markets always exist - even where the law says they shouldn't. Go research the terms "black market" and smuggling".

          >> Like communism, capitalism works as long as you don't allow real people to touch it and leave it on the page where it at least looks nice.

          Communism has never existed anywhere. Go research 'black market" again, if you didn't do it the first time. Or, alternatively, explain the role of money in a communist society, or give an example of a society which works without a common means of exchange of ownership (ownership being impossible in a true communism).

    2. Anonymous Coward
      Anonymous Coward

      Arbitrage as a service

      Think of arbitrage like this. Let's say I want to buy a share of bp. I can go to my broker and ask them to make the trade. If I live in London my broker probably only has a connection to the LSE. If there was no arbitrage, then the price of bp in the US might be considerably lower, but unless I have a relationship with someone who can also trade in the US, I can't take advantage of that price. Also, if I do buy in the US, I have to do the currency conversion as well, which if I'm only buying a single share can't be done efficiently, so I end up losing money on the currency conversion. When you consider arbitrage though, essentially I end up paying a tiny fee to the arbitrageur (indirectly) that guarantees I get as close to the best price as possible.

      The arbitrageur handles all the difficulties of transferring the stock across the atlantic, making the currency exchange, etc. They also do so efficiently because they have the benefit of scale. In return they make a tiny profit, but I get the benefit of that efficiency by getting access to the best price available. It is actually a win-win situation (bizarrely enough).

  16. Anonymous Coward
    Anonymous Coward

    The line between arbitrage and speculation

    The line between arbitrage and speculation is irrelevant. What matters to the company is whether it makes money or not. This chap on trial at the moment, would he have been on trial if his dodgy dealings had got his employers a $2B profit rather than a $2B loss? Of course not.

    "A roadsweeper contributes more to worldwide society than the poshest of posh city traders. He delivers clean streets. They deliver, they contribute, nothing, net. They generate no wealth and add no value. "

    Wise words, sir. Of course there aren't many street sweepers left courtesy of the Millionaires Cabinet and their Blue Labour "public = bad private = good" predecessors.

  17. deshepherd

    Back office to front office

    "if you came to trading from the back office, where those systems exist and are devised, you may well know how to beat those systems. As Leeson did."

    Think the same applies to the current case and the one in France last year as well ... person responsible for the fraud had moved from back office to front office and thus probably understood what would and would not be spotted by the back office checks

    1. Mark 65

      Ironically, as they made the move they were possibly among the best in that department meaning they know exactly what to look out for and how to evade capture.

  18. hplasm

    Excellent article again!

    More proof that we are, indeed living on what will be the Ferengi Homeworld.

  19. amanfromMars 1 Silver badge

    Virtual Day Trading ..... for SMART Bourse Analysts and Investors into Uncommon Lead Vehicles

    "That line between arbitrage and speculation is really quite important."

    For one supports the facts of the others fictions whilst the lesser discipline doesn't, and can't, for lack of proprietary information/lead intelligence/insider trades. ....... and touched upon here today too a tad earlier ......

    There's a lot going on out there, ensuring priceless advantage is taken of the systemic defect/underground utility/safety valve ..... or whatever else you would like to call a significant intelligence deficit in virtual field operations ... AIManoeuvres.

    1. nyelvmark
      Thumb Up

      As always, amanfromMars 1 sums up the general feeling in this thread perfectly. Of course, it's all about being a lizard with a banana in your ear.

  20. Anonymous Coward
    Anonymous Coward


    Traders aren't quick enough to realise the full potential profits of arbitrage trading, so investment banks have for some time been piling money into electronic trading.

    There are now racks of servers running in most investment bank datacentres, dedicated to this kind of trading, so it has become a kind of arms war - he who has the best algorithms running on the fastest platforms with access to the best network interconnections wins.

    This has spread into the client-facing world too. Clients now have the option to take out deals involving algorithmic trading, where their deal is executed tranch by tranch by a computer according to a carefully chosen algorithm intended to maximise the return by making the right deals at the right time across the lifetime of the deal.

    Murky stuff indeed.

  21. Pete 43

    Buy low sell high...


    1. CaptainHook

      Or in the case of shorting

      Sell High, then buy low

  22. bertino


    Saw some contract advertised recently that were after FPGA experts to implement the trades as they are faster than a PC for this kind of stuff. Good rates too.

    This is silly and very far removed from any kind of reality.

    1. Anonymous Coward
      Anonymous Coward

      "FPGA experts to implement the trades as they are faster than a PC"

      Been around for a bit.

      There was an Oxford University spinoff (the name I knew them by was Celoxica but they have had many others) whose initial role in life was tools to let FPGA-naive people program FPGAs in a subset of C (Handel C?). After failing to really take off, the history of the company became a bit murky but for a while a few years ago they were trying to sell their technology to the City because a few ms advantage to get in first on a trade after a price move was meant to make all the difference in the worlds of the jumped-up barrowboys and spivs (sorry, "masters of the Universe).

      The unacceptable face of capitalism. Even Ted Heath knew these people were scum, bless him.

    2. Ru

      "This is silly and very far removed from any kind of reality"

      Got a pension? It isn't nearly as far removed from your reality as you might think. The fact you don't understand the issues, or disapprove of the methods is pretty much irrelevant. Demanding markets become understandable to the common man is not only futile, but counterproductive to boot.

      My other half did some verilog work for an FPGA device being marketed at quants... the key issue they were targetting there was cost and power usage, because when you're doing the particular kinds of simulation they were interested in you can relatively easily parallelise the problem. They'd rather do it using some cheap, fast, low power hardware than another rack of x64 boxes drawing a few kilowatts.

      Not much use for traders though. Their machines can already work waaaay faster than is needed; its the IO bottleneck that slows em down. See above comment about laying dedicated fibre across the atlantic.

  23. SleepyJohn
    Thumb Up

    Accurate details tend to obscure understanding

    While not entirely technically accurate in its details, as some have noted, this article manages to bend the truths just sufficiently to make the basic principles of the operation clear to a layman while not actually being entirely wrong. It may not be accurate enough to teach someone how to do the job but it is accurate enough to explain to someone how the job is done. And it explains that well. The ability to do so is quite rare. Well done.

  24. Charles Smith

    Old Timer

    I moved into the Financial Markets in an IT role in 1985. Even then it was obvious that arbitrage was not investment. The Tobin Tax would have little impact on genuine investment banking which generally involves investing large sums of money infrequently for long term results. The bulk of the high frequency trading and arbitrage is not investment merely speculation/gambling, i.e. only the traders/brokers gain at a cost to the greater public. Taxing on a per transaction basis will help to restore some order.

    I moved my savings into physical gold to protect them when I realised that the "wizards" couldn't play with its value. When Gordon Brown decided selling the gold was a sensible idea I knew it was time to act.

  25. Anonymous Coward
    Anonymous Coward

    Lies to laymen

    "bend the truths just sufficiently to make the basic principles of the operation clear to a layman while not actually being entirely wrong"

    Terry Pratchett et al pointed out in the "Science of Discworld" pop sci books that this is the essence of teaching: simplifying something to point where an expert might describe it as completely wrong, but which allows you to explain the core concepts to someone who isn't an expert. They described it, with tongue firmly in cheek, as "lies to children", and teachers as "liars to children".

    1. Tim Worstal


      Did you really have to reveal to everyone that I use Discworld as my style book?

  26. Mr. Flibble



    Any chance of telling us the date of the programme or where to get the podcast from?

    BBC's website only has the last 5 days-worth :(


  27. The Man

    I'm actually a fan of simplification (i'm an engineer by training so appreciate that the wonderful bodge of It's linear over a small enough range" is a great get out of jail free card) but you do need to point out when you're simplifying or bending the truth so that those in the know can acknowledge this is what you're doing otherwise a lot of credibility gets lost.

    A good example of this was in GCSE physics when teachers would swear blind that light is just a wave..... oh dear.....

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