Levine on arbitrage

I should have signed up for Matt Levine's newsletter ages ago; finally did so. 

His bit on the Spotify arbitrage play was magnificent. 

I don’t know, man. We have talked a few times about Avi Eisenberg, the Mango Markets guy, who found a manipulatable cryptocurrency market, manipulated the heck out of it, made tens of millions of dollars, was arrested, defended himself by saying he was an “applied game theorist” who spotted a good trade that was allowed by the market, and got convicted because nobody ever wants to hear a defense like that.6

Travel Arbitrage

Alex asks if you can fund international travel by moving goods to places where they cost a lot.

Here's how you get to New Zealand.

Buy a Dell M6800 Workstation in the US for $2000 US. That's $2400 NZD.

That same computer sells for $5000 NZD in New Zealand, including GST. So $4350 without GST.

There aren't any of these up on TradeMe (our version of EBay). And I have no clue what discount "hard to warranty but otherwise brand new" computers sell at here. So there's some risk involved. But a $2000 NZD price difference on a single computer would cover an airfare from LAX to AKL. Bring a couple just to be safe. If customs thinks you're going to sell them here, they might stick you with 15% GST on the US price. Parallel importation is fully legal here though - whatever exclusive dealing arrangements Dell has with its NZ branch, the NZ government doesn't care about. If Dell NZ wants to punish Dell US for selling to somebody planning on on-shipping to NZ, that's up to Dell NZ and Dell US to sort out.

I need to replace my aging work Dell Latitude E6500. I drool over the M6800. It would be in-budget at US prices, but no way on NZ pricing. Instead I'm looking at the E6530. It also costs about twice as much as it would in the States.

I don't know why Dell charges double for a laptop in New Zealand. But they do. If I were buying one for personal use, I'd just buy the American one and get it here via YouShop; I'd be very happy to pay Customs the 15% at the border. If the University were doing it, it wouldn't even attract GST at the border as it's for business purposes and then is a non-taxed input. 20:1 that trying that for work would break at least 3 University rules, even if it did save a lot of money.

Apple usually takes a lot of stick for international pricing shenanigans, but their base model MacBook Pro has only a USD$100 markup in NZ (8%); the highest-end one has a $300 markup (11%).

If you're planning on financing your trip by bringing computer kit to New Zealand, compare prices at PriceSpy with prices at NewEgg. I should probably try it next time we head Stateside, just to see whether the arbitrage works. At worst I'm stuck with a new computer at home. I expect that much of the potential gains would be eaten up figuring out NZ/US model equivalencies.

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.

---

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.

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.

Rena or arbitrage?

National's chances of winning the 2011 election peaked around 95% just prior to the Rena crash. Since then, they've dropped to 92%. Matthew Hooton's chalked some of this up to Rena. I wonder if that's it though.

For the last couple of weeks, CentreBet has had National at 1.15: a $1 bet on National paid out at $1.15, which is about $0.87 in iPredict terms. At the same time, National was trading around 95 cents. And I started arbitraging a bit - clearing some of my large long-National short-Labour position at iPredict and putting some big orders in the book to do more of the same while throwing a few hundred onto National at CentreBet. Apparently a few other folks started reckoning National a cheap deal at CentreBet: HomePaddock points to some big money hitting CentreBet on National: they note one $10k bet - far far more than I'd played.

So what's the price at CentreBet now? $1.09. Or, $0.917 in iPredict terms. What's the price at iPredict? $0.9264, but with only about $20 of action in the book between the current price and the CentreBet price. So it's barely worth making the arbitrage play given iPredict's transaction fee for price-takers.

Arbitrage between iPredict and CentreBet can easily account for the entire price drop in National at iPredict.

The price in the Vote Share market has dropped too, though, and this is one that can't be directly arbitraged. National's plummeted there from about 50% just prior to Rena to about 46% now; Labour's risen from 28 to 30; the Greens have risen from just under 10% to just over 11%. The other parties have been somewhat stable: ACT around 3.6%, NZ First around 4.5%, United Future on 1.9%, the Maori Party on 1.25%, and all other parties (includes Mana, Conservatives, and anything else) at 2.2%.

But I'm not entirely confident in the prices in the vote share market. A couple reasons why:

• The price on NZ First is really spikey: somebody keeps coming in and boosting the price up above 5%, but the price on a contract paying $1 if Winston Peters enters Parliament has been below 18% for weeks, barring a few oddball spikes. If NZ First's likelihood of crossing the 5% threshold were accurately reflected in price moves in the vote share market, then we'd see a lot more action around the 50% line in the Peters contract. But we haven't. Why? Presumably because the trader trying to inflate the price of the Peters contract can afford to sustain manipulation on a penny stock where folks taking the other side of the trade would have to lock up tons of liquidity for trivial gains for another month but can't do it where traders taking the other side can earn a reasonable return by smacking him back. Any arbitrage bot working to keep the sum of contract prices at the $1 mark will trade down the big contracts in response to goofing around on the penny stocks.
• If National really were likely to earn 46% of the vote and Labour plus Green were really at 41%, and ACT were only 58.5% likely to return to Parliament, and UF were only 79% likely to return to Parliament, I'm not sure that National would be trading up around 92 cents. But I'll need to update the spreadsheet I'd worked out for the 2008 election and have a play; a lot will depend on how much overhang is generated in the Maori seats this time 'round. Absent substantial overhang, wasted vote from the minors likely doesn't tip the balance between National and Labour/Green.

Preventing arbitrage

Pharmaceuticals are cheaper in Canada than in the States. Even in the absence of Medicare this would likely be the case; income-based price discrimination would have cheaper prices in Canada for goods characterized by very very high fixed costs and trivial marginal cost (adjusting for that the price of everything is higher in Canada). But price discrimination can only be maintained if you make it hard to arbitrage. Car trips to Canada are relatively pricey, but internet sales aren't.

How to prevent re-import this way? Beat the crap out of Google:

Department of Justice

Office of Public Affairs

FOR IMMEDIATE RELEASE

Wednesday, August 24, 2011

Google Forfeits $500 Million Generated by Online Ads & Prescription Drug Sales by Canadian Online Pharmacies

Internet Search Engine Accepted Advertisements from Online Canadian Pharmacies that Targeted U.S. Consumers and Illegally Imported Controlled and Non-Controlled Prescription Drugs into the United States

Ouch. The DoJ's argument is disingenuous though:

“The Department of Justice will continue to hold accountable companies who in their bid for profits violate federal law and put at risk the health and safety of American consumers,” said Deputy Attorney General Cole.  “This settlement ensures that Google will reform its improper advertising practices with regard to these pharmacies while paying one of the largest financial forfeiture penalties in history.” 

I call BS. Prosecution protects a price discrimination scheme and consequently works to keep drugs cheaper for Canadians; in the absence of restrictions on arbitrage, drug companies would have to charge Canadians US prices and would forgo profits in doing so.

If Google is to be policeman for international price discrimination regimes, I wonder what Google's policing costs are.....

Arbitrage Now!

I blame Newman:

A memorable "Seinfeld" episode features Kramer and Newman taking thousands of cans and bottles to Michigan so they can get a nickel more per container than they would in New York, but beverage distributors say there's nothing funny when it happens for real.

In Maine, which has a more expansive bottle-redemption law than neighboring states, three people have been accused of illegally cashing in more than 100,000 out-of-state bottles and cans for deposits, the first time criminal charges have been filed in the state over bottle-refund fraud, a prosecutor said.

A couple that runs a Maine redemption centre and a Massachusetts man were indicted this week for allegedly redeeming beverage containers in Maine that were bought in other states.

Thomas and Megan Woodard, who run Green Bee Redemption in Kittery, face the more serious charge of allegedly passing off more than 100,000 out-of-state containers - with a value of more than US$10,000 (NZ$13,221) - as if they had been purchased in Maine.

That's just the tip of the iceberg.

An estimated 90 million cans and bottles are fraudulently cashed in each year in Maine, costing beverage distributors US$8 million to US$10 million, said Newell Augur, executive director of the Maine Beverage Association.

The whole article's full of win, like this:

In the 1996 "Seinfeld" episode, Kramer and Newman hatch a plan to drive a truckload of cans and bottles to Michigan, because the redemption fee there was 10 cents, double New York's nickel deposit.

Kramer laments it can't be done. "You overload your inventory and you blow your margins on gasoline," he says at one point. But Newman offers up free space in a mail truck he has to drive to Michigan before Mother's Day - "the mother of all mail days," he calls it - and the pair head off. (They end up aborting the trip while chasing down Jerry's stolen Saab.)

"That was a very funny episode," Augur [exec director of Maine Beverage Association] recalls. "But this is not a laughing matter."

Officials estimate that up to one billion beverage containers are sold in Maine each year. Containers sold in other states, however, carry the Maine deposit stamp because it's not cost-effective to change labeling for each state.

The Seinfeld episode is one of my favourites. It's a shame that our students can't now be expected to have seen the canon; otherwise, I could just point to that episode when explaining arbitrage.

It's a tough crime to prosecute: they'll have to prove that the alleged arbitrageur didn't actually collect the cans in the appropriate jurisdiction.

I hope the same AP reporter gets assigned to the next story on overdue library book fines. Mr. Bookman could be referenced....

Nope, that's not a $20 bill lying there

Doherty at Reason points to a new site tracking the price of marijuana.

It's much cheaper in Canada than the States and cheaper on the west coast than the east.

I rather expect that trying to profit from those price differences would be rather riskier than exploiting price differences across different prediction markets.