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ARBITRAGE

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Originally appearing in Volume V02, Page 324 of the 1911 Encyclopedia Britannica.

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ARBITRAGE , the See also:

TERM

term applied to the See also:

SYSTEM

system of equalizing prices in different commercial centres by buying in the cheaper See also:

MARKET (Lat. mercatus, trade or place of trade)

market and selling in the dearer. These transactions, or theirconverse, are mainly confined to See also:

STOCKS

stocks and shares, See also:

FOREIGN

foreign exchanges and See also:

BULLION

bullion; and are for the most See also:

PART

part carried on between See also:

LONDON

London and other See also:

EUROPEAN

European capitals and largely with New See also:

York. When prices in London are affected by See also:

FINANCIAL

financial or See also:

POLITICAL

political causes, all other markets are sooner or later influenced, as London is the banking and financial centre for the See also:

commerce of the See also:

WORLD

world. It may, however, also occur that some See also:

LOCAL

local event of importance initiates a rise or fall in a particular market which must ultimately affect other countries. For instance, a crisis in See also:

France would immediately depress all See also:

French securities, and by exciting the fears of capitalists would stimulate transfers of funds and raise all the exchanges against France. In See also:

ORDINARY (med. Lat. ordinarius, Fr. ordinaire)

ordinary times those engaged in arbitrage operate with a very small margin of profit. The See also:

GREAT

great improvement in postal, telegraphic and telephonic communication enables operators to See also:

close transactions with amazing rapidity, while competition reduces the margin of profit to a minimum. Operations in See also:

AMERICAN

American stocks and shares are carried on between London and New York on a vast See also:

scale, while transactions in See also:

AFRICAN

African See also:

MINING

mining shares are undertaken to a considerable extent between London and See also:

Paris. The frequent fluctuations in the prices of the latter securities offer a large and fruitful See also:

field to bold operators possessed of large resources, while those who have small means often succumb in a commercial crisis. As regards foreign See also:

EXCHANGE

exchange and bullion, arbitrage operators stand on a fairly safe See also:

FOUNDATION (Lat. fundatio, from fundare, to found)

foundation, the fluctuations being slight and involving little or no See also:

RISK

risk, although they yield a very small margin of profit. Arbitrage operations are for these reasons resorted to frequently by one See also:

COUNTRY (from the Mid. Eng. contre or contrie, and O. Fr. cuntree; Late Lat. contrata, showing the derivation from contra, opposite, over against, thus the tract of land which fronts the sight, cf. Ger. Gegend, neighbourhood)

country in supplying the requirements of another. The slightest See also:

ADVANTAGE

advantage in any market is put to profit, and as the margin in ordinary exchange transactions is See also:

minute, the ability to operate in this See also:

CROSS

cross See also:

FASHION (adapted from Fr. facon, agon, Lat. factio, making, facere, to do or make)

fashion renders business possible, which would otherwise be impracticable.

To give See also:

concrete instances of the working of arbitrage the following may be cited: On the 21st of May 1906 the exchange on London in See also:

Vienna was telegraphed from that See also:

CITY (through Fr. cite, from Lat. civitas)

city 24 kronen 44 cents; London, requiring to See also:

PURCHASE

purchase remittances, found that See also:

Antwerp had some Vienna to sell, and arranged to buy there. The transactions worked out as follows:—The See also:

DIRECT

direct exchange in Antwerp on London being 25.2s1, and Antwerp's selling See also:

price of Vienna being See also:

toy francs for See also:

LOO (formerly called " Lanterloo," Fr. lanturlu, the refrain of a popular 17th-century song)

loo kronen, on dividing 25.251- by 105 an exchange of 24•os1 was obtained or 1 cent cheaper than the direct exchange between Vienna and London. Again a portion of the proceeds of the See also:

RUSSIAN

Russian See also:

LOAN (adapted from the Scandinavian form of a word common to Teutonic languages, cf. Swed. Mn, Icel. lan, Dut. leen; the O.E. laen appears in " lend," the ultimate source is seen in the root of Gr. Xeiaecv and Lat. linquere, to leave)

loan of 1906 had to be remitted to See also:

Berlin from Paris. Having exhausted local balances in Berlin, Paris on one See also:

side, and Berlin on the other, sought to prevent See also:

gold shipments from Berlin, and thus cause stringency in that See also:

MONEY

money market. On the 21st of May 1906 Berlin was therefore seeking to sell Paris in London at 81.35 marks for too francs, and draw on London for the proceeds at 20.50. This transaction produced a parity between the exchanges of 25.20, which See also:

LEFT

left a small margin in London. Two instances of arbitrage of stocks are the following:—On the 24th of See also:

March 1906, See also:

JAPANESE

Japanese See also:

EXCHEQUER

exchequer bonds, See also:

SERIES (a Latin word from serere, to join)

series 2 and 3, were bought in Tokio at 931 and were paid for by telegraphic See also:

TRANSFER (from Lat. transferre, to bear across, carry over)

transfer at 24* pence per yen, and were sold in London the same See also:

day at 94 for See also:

PAYMENT (Fr. paiement, from payer, to pay; Lat. pacare, to appease, pax, peace)

payment on arrival of bonds. It took five See also:

WEEKS, EDWIN LORD (1849-1903)

weeks for the transmission of the bonds to London, where they were dealt in on the fixed basis of exchange, namely 241 pence per yen. The London price See also:

WORKS

works out thus: 93.25 X 24.375 Tokio five weeks later. The following is a computation of the transaction: London price . 92.77 Five weeks at 5 % .45 See also:

ENGLISH

English See also:

STAMP (from " to stamp," to strike or tread heavily, hence to impress, O. Eng. stempen, Du. stampen, Ger. stampfen, whence, O. Fr. estamper, mod. etamper)

stamp %, on nominal amount 50 Insurances % •I2 93.84 24.50 =92'77, to which must be added the loss of See also:

INTEREST

interest, as the See also:

FIRM

firm in London paid See also:

CASH

cash on the 24th of March for the telegraphic transfer, and did not recover payment until the arrival of the bonds from This sum represents the See also:

net cost to the arbitrage See also:

house in London, and the money paid on the 28th of See also:

APRIL

April left a profit of about 3a %. The bonds being " to See also:

BEARER

bearer " See also:

INSURANCE

insurance was necessary for the safety in this, as in all similar transactions.

In the next example, however, this expense was unnecessary, the bonds being " inscribed." On the 21st of May 1906 American See also:

STEEL, FLORA ANNIE (1847– )

Steel See also:

COMMON

common shares were sold for cash in New York at 41 dollars per See also:

SHARE (O. Eng. scearu, chiefly in compounds, e.g. land-scearu, a share of land, from sceran to cut; cf. " shear" )

share, and were bought in London at 42- for the See also:

account day, May 31St. These figures are explained by the fact that transactions in the See also:

UNITED

United States stocks and shares are on the fixed basis of five dollars per See also:

pound See also:

sterling, while as regards payments in New York the exchange varies daily. See also:

RAIL

Rail-way shares are generally roo dollars each. In the London market, however, five shares of See also:

ioo dollars would be £ioo nominal. These shares, therefore, cost in London, at the purchase price of 42 h, £42: 4: 5. The money realized in New York for five shares at 41138 was 205.93 dollars. A See also:

CHEQUE, or CHECK

cheque on London was bought at 4 dollars 854 cents, realizing X42 : 8 : 9. It should be noted that the shares in these cases are generally See also:

LENT (0. Eng. lenclen, " spring," M. Eng. lenten, lente, lent; cf. Dut. lente, Ger. Lenz, " spring," 0. H. Ger. lenzin, lengizin, lenzo, probably from the same root as " long " and referring to " the lengthening days ")

lent by the New York correspondent, thus saving loss of interest. The resulting profit in this particular instance was 4S. 4d. for each five shares, divided between the London and New York arbitrage firms. Arbitrage operations with distant countries such as See also:

India are large and mainly profitable. Arbitrage with India consists cl}fefly in buying bills of exchange in London, such as India See also:

COUNCIL (Lat. concilium, from cum, together, and the root cal, to call)

Council See also:

RUPEE (Hindustani rupiya, from Sanskrit rupya)

rupee bills amounting to about 16 millions sterling annually, and commercial bills See also:

DRAWN

drawn against goods exported to India.

The See also:

COUNTER

counter-operation consists in purchasing in India, for See also:

SHORT, FRANCIS JOB (1857– )

short or See also:

long delivery, sterling bills drawn against exports to Great See also:

BRITAIN (Gr. Hperavuml vi7vot, Bperravia; Lat. Britannia, rarely Britannia)

Britain of See also:

INDIAN

Indian produce, such as See also:

cotton, See also:

TEA (Chinese cha, Amoy dialect t€)

tea, See also:

INDIGO (earlier indico, from Lat. indicum, the Indian sub-stance or dye; the Sans. name was niti, from nila, dark blue, and this through Arab. al-nil, annil, gives " aniline ")

indigo, jute and See also:

wheat. These operations greatly facilitate See also:

trade and the moving of produce from the interior of India to the seaports. Without this assistance Great Britain's enormous trade could not be carried on, and she would have to revert to the See also:

PRIMITIVE

primitive system of See also:

BARTER (from Fr. barater, to truck, to exchange)

barter. The same advantages are afforded to her vast trade with See also:

CHINA

China and See also:

JAPAN

Japan, with the material difference that the See also:

SUPPLY (through Fr. from Lat. supplere, to fill up)

supply of See also:

government council bills is confined to the Indian trade. The See also:

BALANCE (derived through the Fr. from the Late Lat. bilantia, an apparatus for weighing, from bi, two, and lanx, a dish or scale)

balance of trade with all countries is generally settled by specie shipments; hence, with the Far See also:

East, See also:

SILVER

silver and gold See also:

PLAY

play an important part in arbitrage. It will thus be seen that arbitrage fills a useful See also:

PLACE (through Fr. from Lat. platea, street; Gr. IrAar6s, wide)

place in commerce; the profits are small because the competition is great; nevertheless huge transactions employing thousands of clerks result from this system. The literature of the subject is extremely meagre. See also:

Lord See also:

GOSCHEN, GEORGE JOACHIM GOSCHEN

Goschen's Theory of Foreign Exchanges(London,1866) is See also:

general and theoretical, but throws great See also:

LIGHT

light upon particular aspects of the See also:

PHILOSOPHY (Gr. gthos, fond of, and vo4 (a, wisdom)

philosophy of arbitrage, without touching specially on the details of the subject itself. The See also:

PRINCIPAL

principal other works are: See also:

Kelly's Cambist (1811, 1835) ; See also:

OTTO

Otto Swoboda, See also:

Die kaufmannische Arbitrage (Berlin, 1873), and Borse and Actien (See also:

COLOGNE (Ger. Koln, or officially, since 1900, Coln)

Cologne, 1869) ; See also:

COQUELIN, BENOIT CONSTANT (1841-1909)

Coquelin et Guillaumin, Dictionnaire de l'economie politique (Paris, 1851–1853) ; Ottomar See also:

HAUPT, MORITZ (1808—1874)

Haupt, London Arbitrageur (London, 1870) ; See also:

Charles le Touze, Trade theorique et pratigue du See also:

CHANGE (derived through the Fr. from the Late Lat. cambium, cambiare, to barter; the ultimate derivation is probably from the root which appears in the Gr. «a urmu', to bend)

change (Paris, 1868) ; See also:

Tate, See also:

MODERN

Modern Cambist (London, 1868) ; See also:

Simon Spitzer, Ueber Miinz- and Arbitragenrechnung (Vienna, 1872) ; J. W. See also:

GILBART, JAMES WILLIAM (1794-1863)

Gilbart, Principles and Practice of Banking (London, 1871); G. See also:

Clare, The A B C of Foreign Exchanges (2nd ed., 1895) ; Money Market Primer and See also:

Key to the Exchanges (2nd ed., 1900) ; J.

Pallain, See also:

Les Changes strangers et les prix (Paris, 1905).

End of Article: ARBITRAGE

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