Syrian arbitrage? [UPDATED}

InTrade says there is about a 63% chance that Bashar al-Assad will no longer be the President of Syria for any reason (including death) before midnight ET 30 June 2013.

iPredict says there is a 57% chance that Bashar al-Assad will be President of Syria AND have effective control of the government and military at 12:01 am 1 July 2013 NZT.

UPDATE: I had read the contract Long Description but not the Judging Criteria at iPredict. The Judging Criteria includes this:

This contract will immediately pay $0 if mainstream media reports say Bashar al-Assad has lost effective control of the Syrian Government or military, or words to that effect. For example, mainstream media reports that Bashar al-Assad has fled the country, or is on the run, or has gone into hiding, or has been overthrown, or has been imprisoned or arrested, will cause this contract to immediately close at $0.

And so the arbitrage opportunity below is much stronger: it only then fails to be arbitrage if al-Assad loses power exactly at midnight. Original post follows below, but do note that this error exists; the case for an arbitrage play consequently is much stronger.

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The iPredict blog poked me wondering if this is an arbitrage opportunity for clever traders. And while I've taken a short position at iPredict, it isn't pure arbitrage. Imagine that the rebels over-run Damascus in April and take the government temporarily before al-Assad's forces come back to regain control in June. In that case, both markets pay out at $1: he would no longer have been President of Syria for a brief period, but he would be President as of 1 July.

Now I find the likelihood of that rather small: I would have thought that if opposition forces took effective control of the government, satisfying the InTrade rules, there wouldn't be more than, what, a 10% chance of al-Assad making it back in before 1 July. So that would justify a small price gap between the two markets.

I will continue to accumulate a short position at iPredict. Once the total value of the position at iPredict gets large enough, I will lay off some of that risk by sending money back into the InTrade market. It isn't a perfect arbitrage as it doesn't protect against the scenario above and I'm at risk if InTrade drops down to the iPredict price in the interim. But getting money out of InTrade takes a long time and standing accounts there draw a $5/month fee. If iPredict were thick enough to make a big play on this, then it could be worth heavily shorting both markets and taking a net short position on that al-Assad will not lose then regain power before July.

Shorting InTrade means paying $0.37 for a contract paying $1 if al-Assad is President on 30 June. Shorting iPredict means paying $0.43 for a contract paying $1 if al-Assad is not President on 1 July. You then pay $0.80 for a contract paying $1 UNLESS al-Assad loses and regains power. If you think the chances of that kind of reversal are around 10%, and if it takes about a 10 cent price gap to make an arbitrage play across the markets worth the hassle, then it's just barely worth making the play.

Twitter tells me al-Assad is now having fighter planes shoot rockets through a university dormatory.

InTrade also has just opened markets on the Oz election (HT: @Insteconomics); interesting arbitrage plays could come up with BetFair and iPredict. BetFair has the Coalition as most likely at about 72%; iPredict has the Coalition at 76%; InTrade has a spread between 64% and 80% for the Coalition. So no real arbitrage plays there yet, but worth watching.

Final Arbitrage Tally

The final tally for the InTrade arbitrage:

• Lost $NZD 636.77 at iPredict going long Romney. I should have lost $679.68, but backed out of some of my Romney position when things were looking clear. I'll count $679.68 as arbitrage loss; I did take on some minor risk in reversing some of my Romney position. 
• I made a series of credit card deposits to InTrade, ultimately reaching the $5000 US limit. My NZ card was charged $6209.96 for the USD$5000 deposit.
• I sent BetFair AUD$1000 to buy Romney; BNZ charged NZD$1286.51 to my card. I'll add $15 AUD to that to cover the money I there pulled from my standing account as BetFair charges 1.5% on deposits. So NZD $1305.81 lost at BetFair.
• Total costs then were NZD $8195.45
• InTrade wired me USD$7373.65 - my deposit, plus my winnings, less the $20 my account was in the red when I deposited, less a $20 bank wire fee charged by InTrade. This turned into NZD $8915.89, less a $15 wire charge from BNZ: $8900.89. 
• It took a fairly long time to get the money out of InTrade; I requested the withdrawal on the 7th of November; it arrived on the 19th of November. Fortunately, the credit card isn't due for a couple more days. 
• Somebody charged me an implicit currency exchange fee: Yahoo Finance cites rates of $0.818 for Monday, 19 November; $7373.65/$8915.89 = 0.827. This matters on these kinds of plays: had I been charged the interbank rate rather than somebody along the way taking a cent on the exchange rate, I'd have received $9014.24 instead of $8915.89. Because of the long lag between the withdrawal request and the relative volatility of the $NZD, you need some reasonable expected gains to be sure you don't lose out. Every one cent move in the $NZD costs about $100. If I'd only had expected arbitrage gains of $200, the realised amount could halve or increase by 50% ridiculously easily. 
• $8900.89 - $8195.45 = $705.44 net profit.
• UPDATE: Wow. I entirely forgot this one. I've a BNZ Platinum that gives me $1 in Airpoints Dollars for every $90 spent. So I get $91 in AirPoints dollars. 

I phoned IRD. They count this as winnings on betting and those aren't taxed. I did note that iPredict is a futures exchange for regulatory purposes in New Zealand; they didn't much care. The woman on the phone said that if I were trading on these every day so that it were more like income, then it would count. But one-offs like this are fine. I didn't ask how it would be treated if someone set up a Kiwisaver fund that accepted investments for trading on these markets.

Because it took almost two weeks to get my earnings out of InTrade, I was exposed to unhedged currency risk, making this not a pure arbitrage play.

Lesson: it's worth having standing accounts across a range of trading platforms. It takes far too long to set up an account to only do it when an opportunity comes up. Arbitrage gains are real, especially when a whale lands like the one that seemed to be trading at InTrade propping up Romney's price. But it takes a reasonably large price spread across markets. A one-cent spread covers the bank's exchange rate charge one-way; a two-cent spread covers two-way bank exchange rate charges; a three-cent spread covers the exchange charges plus half of BetFair's deposit fees; a four-cent spread leaves you a small amount of arbitrage gain but exposed to currency risk.

And be careful if you're financing this on the credit card: if the expected payout date plus a fortnight is after your credit card is due, your costs are going to be higher.