Keeping away from the technical gibberish, â€œArbitrageâ€ is defined simply as buy low and then sell high. It is the most spoken word in Finance and Economics when someone takes advantage of the price difference between two or more markets to make risk free profit.
The Apple Market
You are a brilliant, ambitious yet unemployed young boy who just finished school.All youâ€™ve got is your brains and your brand new bicycle.
One day while buying fruits in afruit market A, of your town, you find that the apples are priced $2 more than the fruit market B, in the nearby town. You get an instant flush of ideas and quickly pedal to market B to check the market price of apples;it is still $2 less than that of your townâ€™s fruit market.
From that day on, you buy as many apples you can from the nearest market and sell it in your town for a profit of $2 per apple.Thisword may sound a bit fancy, butthe idea behind it is very simple.
Supply and demand kicks in
You sell apples every day; you make $2 for every apple you sell. One can make risk free profit, but then here comes your worst enemy, Supply and demand.
You have been selling your apples along with all other Apple traders in Market A. This means more apples for fewer consumers, this leads to an increase in thesupply of apples. Apples are in abundant in Market A; in turn, this leads to a reduction in apple price.
The price of the apples here is $2 less, and you buy apples from Market B everyday which means, there will be fewer apples for consumers at Market B and consumers as you know will be willing to pay more money for what they wanted. Now evidently the price of the Apple will go up.
Without your knowledge, you have normalised the abnormality in the situation.You have become the causeof the supply and demand of apples between these two Towns. And as you continue your routine everyday both the market price will get saturated and one day there will be a common price for apples in both the towns.
Arbitrage and its types
Where there is risk-free money, expect tonnes of fancy words. Following are the types of Arbitrage as classified in Finance and Economics:
They play close to the chest and hence proudly called as Risk Arb. The process goes like this; the stock of the company which is going to be taken over is purchased exactly at the same time as selling the stocks of the company which is taking over. Looks quite risky, at times you could get bankrupt with this,yet people do it as the take is huge.
This type provides a form of security for tracking stock on a financial market located in another country. The difference between the real value and the perceived value determines the profits gained.
This type made a revolution in the United Kingdom; phone users in the UK were given a special access number to make international calls for free. This system was made possible by UK based Telecom Company such as Action Telecom UK.
These guys were paid an interconnect charge by the UK mobile networks as their customers frequently used up free minutes. While the users thought they were calling their relatives abroad for free, they were using up their free minutes for the month.
Simply the imbalance in the expected values;all casinos have a Statistical Arbitrage in every game of chance. Perhaps you have heard of House Advantage, House edge or House vigorish.
Also called as the VolArb, is one of the known forms of Statistical Arbitrage. The VolArb is most noticeably known for its help in buying and selling of delta neutral assortment.
This type is also known as Geographical Arbitrage. As you might have already guessed, yes it is the simplest form of Arbitrage which utilisesprice difference between geographically separated markets.
For example, there could be a bond dealer in Washington bidding less than a bond dealer in Virginia. For untold reasons, they both may not know the position and value of their bonds,but an Arbitrageur does and gets to work immediately.
The Story of Ben the buyer
It all started in 2008 when Ben Hovell a British scientist ordered a product on eBay for his personal. To his surprise the product was delivered to him from Amazon, this got Ben thinking as to what had happened. Ben found out that the price of the same product was lower at Amazon and that eBay had played Arbitrageur.
What has happened?
- Ben ordered a product from eBay
- The eBay seller ordered the product on Amazon and used Benâ€™s address for the shipment of the product
- Amazon shipped the product to Ben
- eBay maintain the difference in pricing for himself
This incident inspired Ben to get into Arbitrage selling business himself.From 2008 Ben faced plenty of problems which were played smart by; he even automated several of his functionalities with thesoftware of his creation. Currently Ben is working on software which he will give off for FREE to automate listings on eBay and Amazon.
In earlier days the price dispute is allowed to settle by itself with the help of local dealers.Now, we live in a digital world, Amazon and eBay make more than a million price changes every day.It is impossible for an individual to sit down, take notes, comprehend and make new changes, It would take forever.
That is why we need automated systems to do our work, after all, we are living in the age of Elon Musk, and Artificial Intelligence, anend to end automation is the least technology can offer.
Following Ben is Doug Feigelson a former Arbitrageur the creator ofend to end automated software called PriceYak. PriceYak is the most automated software for Amazon to eBaylisting; it automates the entire process. One can work more on customer satisfaction and return management effectively with the inclusion of automated software such as these.
What PriceYak does?
- Creates eBay listings from Amazon products almost every hour
- Reprise eBay listings when Amazon changes its price
- Automatically order sold items from Amazon
- A report is tracked back to eBay once the order is dispatched
Patience and Knowledge is the Key
Arbitrage is a patient and cunning process regardless of where you implement it. Companies now a day are using computerised methods Amazon has identified this problem in the early 2012s and has come up strong like Amazonâ€™s API provided by Stegeman Technologies, to correct any difference in pricing across the globe.
Many people who wanted quick cash have invested a lot in these Digital practices and have lost tonnes of money, we need an expertâ€™s view on this, and a lot of knowledge with tonnes of patience and technology is the catalyst that binds all these together. There is hope and as I once heard from a person that â€œA man with patience and Knowledge can accomplish anything in this world.â€