Evening star. [volume] (Washington, D.C.) 1854-1972, 1909-08-15
SUNDAY STAR WASHINGTON, G.. AUGUST l.

York and London. There are many other
firms which arbitrage at times when
they see possibilities of large profits
in such transactions. but such oppor-
tunitieS occur but seldom.
Although arbitrage is very lucrative
business. there are several reasons why
more firms do not engage in its regu-
larly. In the first place, the nature of
the business requires a great deal of
capital. The transactions yield but a
American is bent on making largsNrof-
it's even at greater risk. European ap-
preciate more the Importance of lany
small profits. Though in principle the
arbitrage business is simple. in practice
it is most difficult. and requires eXcep-
tional skill and Judgment.
Since transactions in both markets
are necessary TO complete an arbitra ge
operation. an arbitrage firm must have
Il strong correspondent In London to
carry on the London end of the bust
ness. The arbitrage business is usually
done on a joint account.-that is, the
New York firm and its London corre-
spondent have an arbitrage account in
common, and they share evenly the
profits. or the losses if such there be.
The London correspondent must be
strong financially and have expert ar
bitrage specialists. Most Of the large
arbitrage firms are long established
houses, which would have strong inter-
national connections even if they did
not engage in arbitrage.
Although for convenience transactions
will be referred to AS planned and origi-
mated in New York, the arbitrage ex-
firm may just as often plan and begin
an arbitrage operation. cabling to the
New York firm to complete the trans
action by purchase or sale on that
market
The New York Stock Exchange closes
at pm. except Saturdays. The Lon
don Stock Exchange formally closes at
4 PM, although trading is often con-
Quoted for short time on the exchange
floor after regular hours. Since London
time is five hours ahead of New York
time. it is pm. in London when the
New York market opens. For only
about an hour each day, between 10 and
II am. or little after. can there be
arbitrage carried on between the two
exchanges. Arbitrage does not cease
at about II am. New York time. how
ever. Immediately after trading ceases
on the London exchange the London
curb, or Shorters' court, comes into be-
ing. The London curb is not like the
New York curb in regard to member
ship. No one is allowed to trade on the
London curb except members OF the
London Stock Exchange. 1t is sur
rounded by the walls of the exchange
and by the offices of the three cable
companies. There is trading in ''+Ameri-
cans on the "Shorters court often un-
til the New York Stock Exchange closes,
at pm. London time.
At little after am. New York
time. the two largest news agencies
send out the London l pm. prices. Be
tween 8 and o'clock the New York
arbitrage houses begin to send and
receive messages to and from London.
The London news and prices are re-
ceived, and before the New York mar
ket opens orders are placed in both ex-
changes.
The New York Equivalent.
The prices of American stocks are
quoted in London in a peculiar way and
require translation into New York
equivalents. London quotes American
stocks on an arbitrary basis of IS to a
pound sterling. Since the par of ex-
change is s4.S665 and the current rates
are close to this figure the London quo
tations are always higher than the
New York equivalents. The value Of a
pound sterling varies from day to day.
SO in translating prices the par is dis
regarded and the price of cable or in
Simultaneous exchange is used in cal
culation. To find the New York equiva-
lent the London price is multiplied by
the cable exchange rate and divided by
five. Suppose Amalgamated Copper sells
in London at 80, when exchange is
quoted at 4S7. SOx4S7.5-$77.92 New
York equivalent. To translate New
York price to the London equivalent the
process is simply reversed, 77.S2X:4S7
$50. Arbitraguers do not figure out
these TRANSACTIONS of prices. but read
the purpose.
Usually the best opportunities for ar
bitrage occur in the few minutes after
the New York Stock Exchange opens.
Conditions are often such in the United
States as to cause the New York market
to disregard tine London prices "on
opening" Sometimes for several days
the London market will be weak and the
New York exchange will open strong
At such times arbitrage transactions act
as a balance wheel and tend to prevent
wide variations in the prices in the
two markets. The arbitraguers keep on
buying in the cheaper and selling In
the dearer market until the New York
and London prices come SO close to-
gether on prices as to preclude profitable
arbitrage transactions. When the mar
kets are particularly active and the va
riations in prices in the two markets
comparatively merge 1T is often profit
able to arbitrage until the New York
Stock Exchange closes. On the other
hand. it often happens on days of dull
markets that stocks are practically on
a parity in the two markets. and there
is little opportunity for arbitrage even
at the opening of the New York mar
ket.
The best days for arbitrage operations
are days when there is not only an &C
tive, but a steady market. in both New
York and London. 1t is difficult to Sc
cure the execution of orders during
quiet market at the prices expected. On
the other hand, arbitrage is dangerous
in days of erratic stock movements
when the price variations between New
York and London are apt to be greatest
and when it would seem that there
would be the largest profits in arbi-
TRACE. No one can tell on a wild day,
even approximately. what either market
will do in the time that elapses before
an arbitrage transaction entered in on
one market can be completed by an OPP
posite transaction across the ocean.
Even in consistent, active markets an
arbitraguer cannot depend on securing
the executions of orders as he expects
every time. since prices are Influenced
constantly by factors whose coming and
effect cannot be accurately foretold. AS
one arbitraguer said: There is no use
in trying to arbitrage during panic. If
one wishes to gamble. he can do it
cheaper in one market.
NEW YORK PRODUCE.