213. International Arbitraging

Coming now to the third class of international security dealings, it appears that out of the maintaining of the parity of the various stock and bond markets arises a large volume of dealings. With cable facilities developed as they are now, it is evident that it is impossible for stocks in which there is any broad market to be selling very far apart on two different exchanges. Expert arbitrageurs are at hand in every market constantly receiving cable reports from other markets in which they work, and their operations continually tend to bring together prices and keep them on a parity.

Without becoming involved in the intricate details of arbitraging between stock exchanges, it may merely be said that on account of the difference in time the only part of our session in New York during which the London market is open is between 10 and 11 o'clock in the morning. During that time the same active stocks are being traded in on both exchanges at the same time. And during that hour there are a number of houses with direct connections at each end of the cable who are watching their chance to shave out a difference of anything from an eighth of a point to a point.

214. Value Of Early News

If the arbitrageurs are so keen, why is there ever any difference in the parity, or a chance for any one to make money? Simply because the same influences affect the two markets differently and news often reaches one market before the other. Foreign political disturbances, for instance, are more likely to start selling movements among foreign speculative holders of American stocks than among speculators here. When a movement like that begins it will be easily seen where the arbitrageur's chance comes in. Stock is being pressed on the foreign market. Realizing that fact, he gets the best bid here and deducting the fraction he is willing to make, cables the bid to the other market. If he has sized up the movement right, the chances are that his bid will buy the stock and that he will be able to make the difference.

Strictly speaking, both ends of an arbitrage transaction are closed at the same time and no risk is taken. In actual practice, however, it continually happens that the chance to do a good stroke of business presents itself conditional to the arbitrageur's being willing to buy or sell in one market and wait a few minutes before closing the other end. This is particularly so in the less active stocks. Frequently it happens that shares of this kind are offered in a foreign market at such a concession from the last price here that the operator can be practically sure that if he takes the stock offered, the next bid here will enable him to get out at a good profit. In dealings of this kind there is naturally an element of risk and in bad markets considerable losses sometimes have to be taken. Success in that kind of arbitrage presupposes great skill and shrewdness on the part of the operator.