is a lot of money -- if you've got a fast computer cluster, a good software engineer, and a blazing network connection, you can turn out
ten or twenty million
dollars a day.
Not bad, considering that all you're doing is exploiting the fact that there's a person over here who wants to buy something and a person over there who wants to sell it. Not bad, considering that if you and all your arbitraging buddies were to vanish tomorrow, the economy and the world wouldn't even notice. No one needs or wants your "service" but it's still a sweet way to get rich.
The best thing about arbitrage is that you don't need to know a single, solitary thing about the stuff you're buying and selling in order to get rich off of it. Whether it's bananas or a vorpal blade, all you need to know about the things you're buying is that someone over
here
wants to buy them for more than someone over
there
wants to sell them for. Good thing, too -- if you're closing the deal in less than a microsecond, there's no time to sit down and google up a bunch of factoids about the merchandise.
And the merchandise is pretty weird. Start with the fact that a lot of this stuff doesn't even exist -- vorpal blades, grabthar's hammers, the gold of a thousand imaginary lands.
Now consider that people trade more than gold: the game Gods sell all kinds of funny money. How about this one:
Offered: Svartalfaheim Warriors bonds, worth 100,000 gold, payable six months from now. This isn't even
real
fake gold -- it's the promise of real fake gold at some time in the future. Stick that into the market for a couple months, baby, and watch it go. Here's a trader who'll pay five percent more than it was worth yesterday -- he's betting that the game will get more popular some time between now and six months from now, and so the value of goods in the game will go up at the same time.
Or maybe he's betting that the game Gods will just raise the price on everything and make it harder to clobber enough monsters to raise the gold to get it, driving away all but the hardest-core players, who'll pay anything to get their hands on the dough.
Or maybe he's an idiot.
Or maybe he thinks
you're
an idiot and you'll give him ten percent tomorrow, figuring that he knows something you don't.
And if you think that's weird, here's an even better one!
Coca-Cola sells you a six-month Svartalfaheim Warriors 100,000 gold bond, but you're worried that it's going to fall in value between now and D-Day, when the bond matures. So you find another trader and you ask him for some insurance: you offer him $1.50 to insure your bond. If the bond goes up in value, he gets to keep the $1.50 and you get to keep the profits from the bond. If the bond goes down in value, he has to pay you the difference. If that's more than $1.50, he's losing money.
This is basically an insurance policy. If you go to a life-insurance company and ask them for a policy on your life, they'll make a bet on how likely it is that you're going to croak, and charge you enough that, on average, they make a profit (providing they're guessing accurately at your chances of dying). So if the trader you're talking to thinks that Svartalfaheim Warriors is going to tank, he might charge you $10, or $100.
So far, so good, right?
Now, here's where it gets even weirder. Follow along.
Imagine that there's a third party to this transaction, some guy sitting on the sidelines, holding onto a pot of money, trying to figure out what to do with it. He watches you go to the trader and buy an insurance policy for $1.50 -- if Svartalfaheim Warriors gets better, you're out $1.50, if it gets worse, the trader has to make up the difference.
After you've sealed your deal, this third party, being something of a ghoul, goes up to the same trader and says, "Hey, how about this? I want to place the same bet you've just placed with that guy. I'll give you $1.50 and if his bond goes up, you keep it. If his bond goes down, you pay me
and
him the difference."
ten or twenty million
dollars a day.
Not bad, considering that all you're doing is exploiting the fact that there's a person over here who wants to buy something and a person over there who wants to sell it. Not bad, considering that if you and all your arbitraging buddies were to vanish tomorrow, the economy and the world wouldn't even notice. No one needs or wants your "service" but it's still a sweet way to get rich.
The best thing about arbitrage is that you don't need to know a single, solitary thing about the stuff you're buying and selling in order to get rich off of it. Whether it's bananas or a vorpal blade, all you need to know about the things you're buying is that someone over
here
wants to buy them for more than someone over
there
wants to sell them for. Good thing, too -- if you're closing the deal in less than a microsecond, there's no time to sit down and google up a bunch of factoids about the merchandise.
And the merchandise is pretty weird. Start with the fact that a lot of this stuff doesn't even exist -- vorpal blades, grabthar's hammers, the gold of a thousand imaginary lands.
Now consider that people trade more than gold: the game Gods sell all kinds of funny money. How about this one:
Offered: Svartalfaheim Warriors bonds, worth 100,000 gold, payable six months from now. This isn't even
real
fake gold -- it's the promise of real fake gold at some time in the future. Stick that into the market for a couple months, baby, and watch it go. Here's a trader who'll pay five percent more than it was worth yesterday -- he's betting that the game will get more popular some time between now and six months from now, and so the value of goods in the game will go up at the same time.
Or maybe he's betting that the game Gods will just raise the price on everything and make it harder to clobber enough monsters to raise the gold to get it, driving away all but the hardest-core players, who'll pay anything to get their hands on the dough.
Or maybe he's an idiot.
Or maybe he thinks
you're
an idiot and you'll give him ten percent tomorrow, figuring that he knows something you don't.
And if you think that's weird, here's an even better one!
Coca-Cola sells you a six-month Svartalfaheim Warriors 100,000 gold bond, but you're worried that it's going to fall in value between now and D-Day, when the bond matures. So you find another trader and you ask him for some insurance: you offer him $1.50 to insure your bond. If the bond goes up in value, he gets to keep the $1.50 and you get to keep the profits from the bond. If the bond goes down in value, he has to pay you the difference. If that's more than $1.50, he's losing money.
This is basically an insurance policy. If you go to a life-insurance company and ask them for a policy on your life, they'll make a bet on how likely it is that you're going to croak, and charge you enough that, on average, they make a profit (providing they're guessing accurately at your chances of dying). So if the trader you're talking to thinks that Svartalfaheim Warriors is going to tank, he might charge you $10, or $100.
So far, so good, right?
Now, here's where it gets even weirder. Follow along.
Imagine that there's a third party to this transaction, some guy sitting on the sidelines, holding onto a pot of money, trying to figure out what to do with it. He watches you go to the trader and buy an insurance policy for $1.50 -- if Svartalfaheim Warriors gets better, you're out $1.50, if it gets worse, the trader has to make up the difference.
After you've sealed your deal, this third party, being something of a ghoul, goes up to the same trader and says, "Hey, how about this? I want to place the same bet you've just placed with that guy. I'll give you $1.50 and if his bond goes up, you keep it. If his bond goes down, you pay me
and
him the difference."
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