Evening star. [volume] (Washington, D.C.) 1854-1972, 1909-08-15
ARB|TRAGE IN STOCKS
important Field of Operations
Between Exchanges.
TECHNIQUE OF TRADING
instantaneous Transactions Between
Distant Financial Centers.
HARM0NIzEs THE MARKETS
Tends to Prevent Violent Fluctua-
tions in Prices-Business Mainly
Between New York and London.

One of the most interesting fields in
financial operations is the arbitrase busl-
ness carried on between the stock eN-
changes of the leading financial centers
In periods of great market activity the
amount of arbitrage operations carried or
by brokers who specialize in that KIND
of trading involves very large sums The
most important function of arbitrase
transactions is to prevent wide variations
in the prices of stocks traded in on more
tons also act as sort of balance wheel
tending to prevent violent fluctuations In
prices on any one exchange.
Arbitrage has been defined as business
founded on calculations of temporary
differences in the prices of securities
carried on through simultaneous pur-
chase in the cheaper and a sale in the
dearer market. Whenever security is
traded in on more than one market there
will necessarily be at times differences
in the prices quoted. These differences
will be nominal or material according tC
the peculiar conditions influencing the
different markets.
While it is true that all exchanges are
sensitive to a great degree to all the
factors that determine value. 1t will be
readily seen that one market may be even
seriously affected while another may not
feel the disturbing factor, at least until
later readjustment. For example, II
the dividend should unexpectedly be pass
ed on the stock of a prominent English
railway. all the other stocks. including
the Americans traded on in London.
would follow that particular stock down
ward. The New York market would
probably not he shaken. particularly if
conditions justified an advancing move
ment then in progress.
The momentum of decided upward OF
downward movement of prices on any
exchange is SO great that usually all eau
ton is swept aside until the movement has
spent its force In strong bull mar
ket all bear news is apt to be dis
credited, and in bear market bull
news is seldom needed, until the move
ment, whichever it may be, collapses of
be rising in London, while they are fall
ing in New York. Throughout the day
stocks in all markets eddy back and
forth, and often the trend of prices for
one day or for several days will be
against the general trend or swing of
the market. 1t is not surprising then
that there are usually variations more or
less marked in degree between the prices
of the same stocks in different markets.
Brokers specializing in arbitrage take
advantage of these variations in prices
between exchanges and are able to do a
large and remunerative business by trad
ing simultaneously in two markets.
though incidentally, as suggested before.
these brokers perform a valuable service
to the financial world.
Intercity Arbitrage.
In times gone by there was a large
business in arbitrage carried on between
the New York Stock Exchange and the
New York Consolidated Exchange. There
was also considerable arbitrage at times
between the New York Stock Exchange
and the exchanges of Pittsburg Philadel-
phia, Chicago and Boston. About eleven
years ago the New York Stock Exchange
adopted a bylaw prohibiting arbitrage
with other domestic exchanges. Since this
bylaw was adopted there have been. in
spite of statements to the contrary, al
most no arbtrage transactions between
the New York Stock Exchange and other
domestic markets. There are many min-
ing stocks listed on the Boston Stock EN-
change. and there are continual arbi-
TRACE operations between the Boston eX-
change and the New York curb. arbitrage
between the Boston curb and the New
York curb Is active at times. In the west
there are arbitrage transactions in min
ing shares carried on between the San
Francisco Stock Exchange and the ex-
changes of Tonopah and Goldfeld. There
is. however. little arbitrage between do
nestle markets compared with the bust
ness carried on between markets of differ
ent countries. There is large expense
attached to arbtrage transactions for
clerk hire, telegraphing and interest. Then
the domestic markets are usually quite
close together on prices, so the Gpportuni-
ties for arbitrage between domestic mar
kets are not usually very attractive.
The bulk of the arbitrage business is
carried on between the New York Stock
Exchange and the markets of Europe,
especially with the London market. On
active days arbitraGe firms trade in up to
100000 shares on the New York Stock Ex-
change. One of the arbtrage experts or
arbitrageurs," as they are called has
bought or sold 10000 shares in New York
in one day. 1t is possibly not generally
known that there is a large amount of
arbitrage transactions between the New
York Stock Exchange and the Berlin,
Frankfort and Amsterdam exchanges.
The American stocks that are most active
in Berlin and Frankfort are those of the
Baltimore and Ohio, Canadian Pacific
and Pennsylvania. The lower priced
stocks are preferred in Amsterdam There
is often an active market i'm Amsterdam
for American securities inactive in New
York. There are days when the trading
in American securities in Amsterdam is
larger in amount than in London.
Arbitrage in bonds between New York
and the European markets is o. consid-
cradle Importance. Two of the largest
arbitrage houses in New York specialize
in bonds that have an International mar
ket. Sonic of the bonds that are active
in European markets are the Atchison,
Topeka and Santa Fe general mortgage
the Lake Shore and Michigan Southern
:31ss. the Pennsylvania convertible 3ss, the
Union Pacific and Southern Pacific con-
vertible As and the United States Steel
sinking fund is.
However large the arbitrage BUSH . 5
may be at any one time between New
York and other European markets, the
great bulk of arbitraee transactions is
between New York and London. Ar
bitrage between New York and London is
by no means a recent development Be-
fore the Introduction of cables one of
the few large firms at present engaged in
arbitrage had swift horses to carry arbi-
TRACE messages between the incoming and
outgoing steamers and the markets.
In civil war times there was a large
arbtrage business carried on between
New York and London in United States
government bonds. The fluctuations of
these bonds at this period offered attrac-
tive though risky opportunities for arbi-
TRACE When these bonds obtained an ar
tificiaI value because OF the privilege
which national banks were given TO issue
notes against these bonds deposited. it
became improbable for individuals either
here or abroad to hold them. and specu-
lation in them died out.
Arbttrage Specialists.
The arbitrage specialists did not suffer
from the disappearance of the govern
lnent bonds as medium for arhitrage.
Speculation on both sides OF the Atlantic
became more and more active in the
stocks of American railroads, and of late
years there has been an active mar
ket for few American industrial
stocks: An active market is necessary
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