Monday 5 November 2012

Barriers to Arbitrage

Having noticed a substantial price difference between InTrade and BetFair on the US elections, I figured I'd go and make some money. I've accounts with both, though I haven't traded with either for rather some time. I can buy a Romney contract at BetFair for $2.30; I can buy an Obama contract at InTrade for $6.58. The contracts span the space, have a guaranteed payout of $10, and cost $8.88 plus minor transaction fees. So about an 10% guaranteed return. Time to log in to the old accounts, throw in most of the credit card limit and give it a go.

Then I saw this over on InTrade.

Documentation Requirements

To comply with Irish anti-money laundering regulations we require all Intrade customers to provide the following documentation:
  1. Proof of identity in the form of passport or drivers license (must include photo).
  2. Two proofs of address in the form of utility bills or bank statements (each different - not for the same utility or bank account), recent tax or insurance statements or certificates etc. These should show your residential address and not PO Box numbers.
You will need to supply this documentation before you can deposit funds, withdraw funds or trade any markets. We understand this is a hassle but it is now a legal requirement for all Intrade customers.
Fortunately, I have this stuff kicking around in a desk drawer. So I've scanned it and uploaded it. And now I wait for verification, presumably along with hundreds of other would-be arbitrageurs.

While waiting, I head on over to the Deposit page to see if it'll let me put in some money [it won't]. And I find this:
Attention US Customers: If your credit or debit card was issued by a US bank then unfortunately you will not be able to use your card to fund your account. New regulations that came into force in the US in 2010 now heavily restrict the use of credit and debit cards on sites such as Intrade.
Ah, yes. American anti-fun legislation that blocks unsophisticated would-be American arbitrageurs from the market.

How can price differences across markets persist? You need enough people with enough forethought to have standing up-to-date accounts on all markets who either are not American or who know how to route around the restrictions imposed on American traders.

I suspect that when I finally get the email from InTrade saying I'm good to go, the arbitrage opportunity will have passed.

Update: When the market does open up for me, I will spend a bit of time reading both contracts pretty carefully. I was almost burned in the Australian elections....

Update: InTrade approved my details at 00:30 NZ time this morning. I deposited $3k. Went to deposit $1k to BetFair to lay off the risk, and Bank of New Zealand declined the credit card transaction, almost certainly because it's part of a suspicious pattern of transactions. And they don't have a staffed phone line until 6:30 am. Great that BNZ is watching out for me; not so hot that they have zero people able to unblock transactions of this sort at legitimate business hours of 5 a.m. At least I knew enough to wait until I had balances sitting on both markets before trading on either...I usually have both markets as separate opened tabs, then try to click both as close to simultaneously as I can.

Update 2: I've made a play, but account fees at BetFair limit potential returns. Detailed here.

Update 3: Final arbitrage position statement.


  1. So I wonder, how do people actually get to make the punt, if the system won't take their credit cards. I went to hire a car in Thailand, and after the battery of computer questions it said 'what is your credit limit in Thai baht"? This entailed guessing what
    the system decided the exchange rate was to two decimal places , and I never managed it. Buying things with credit card can be impossible. I had to go to their office [ 40 minutes for 12 kms ] and put card though machine.
    There is still Obama at 77 cents on I -Predict, though when ever I go there the price changes within the transaction.
    Thai is Obama will be 77 cents for the first dollar and 99 cents for the last dollar of your wager.

  2. 1. InTrade is ridiculously thick. BetFair is very thick. No chance that my play moves either market, and I'll drop $4k on it.
    2. I just hit that problem, and BNZ doesn't have an after-hours number that would let me clear the transaction. Irritating. $3K made it to InTrade; wanted to send $1K to BetFair. The latter was declined likely as part of suspicious pattern of transactions. Glad my bank does that; irritated that they don't have a staffed line letting me approve the transaction.

  3. Thank you for the article. I was trying to do the same thing, but my credit card does not allow me to deposit money to Intrade, so that was that. On a side note, I find the arbitrage very suspicious, especially since the gap WIDEN just two days before the election when you would think that as the election approach, more money will pour in and thus eliminate the gap. While there are a lot of potential explanation for that, the cynical perpon inside me have a theory that people in Romney camp is manipulating the price in Intrade to avoid bad press. Here is some justification,

    1, it is not that expensive to manipulate Intrade. The daily volume is something like 150,000, which is 1.5M in notional value. My guess is that you only need to provide 1/3 of the volume to maintain the price in a specific target.
    2, Intrade is much more widely followed by US media than Betfair. If Obama is trading at 75% at Intrade, my guess is that the media will be all over it. There is a strong incentive to avoid these coverage in the Romney camp.
    3, There are some suspicious trading activities going on, such as the trade documented by this article :

    I realize that I sound like some crazy conspiracy theorist. But I am wondering what is your thought on this? What

  4. In theory, non-price traders just increase the incentive for folks like me to go in and take their money. I've started doing this. But returns are limited by account fees at BetFair (see today's post).

  5. "Ah, yes. American anti-fun legislation that blocks unsophisticated would-be American arbitrageurs from the market."

    Hey, stop making fun of the "land of the free." Just cuz you bailed on all the freedoms we have here. ;-)

  6. Maybe I phrased that badly. Sophisticated American traders can still use InTrade, they just have to route the money through a foreign bank. I didn't mean to say that Americans generally are unsophisticated, just that the additional hurdle for Americans limits arbitrage to folks who are pretty committed.

  7. Actually, I was being facetious. it's amazing how much personal liberty is restricted in a supposedly free country.

  8. Sure, and I make fun of that in a lot of other posts encouraging Americans to emigrate to NZ, and especially poking American libertarians who claim to value freedom over everything else that they really don't put much value on it when push comes to shove if they're willing to trade a couple points marginal tax rate for massive civil liberties infringement. But that wasn't the point I was making here.