Owing

to the system of calculating values for American stocks on the London Stock Exchange prices on the London exchange are 2 5-8 per cent of the market prices, whatever they may be, higher than the prices for the same stocks on the New York Stock Exchange when they are the equivalent of the prices on the New York exchange. In arbitrage dealings allowance has to be made for this difference in prices between London and New York, which is seeming and not actual. For a completer explanation see American stocks in London. The difference in equivalent prices between New York and London permits two kinds of operations in stocks that are dealt in in both markets. One operation is called a spread and the other is called a back spread. In the spread there must be more than the normal difference in prices between London and New York. The stock is sold in London where the higher price prevails and is bought in New York where the lower price prevails. Then when the - _ - — equality in price is restored the transaction is closed by buying in London and selling in New York. The profit is the amount of the difference that had existed in exce of the normal difference. For example, when a stock is selling in New York at 100 the equivalent price in London is 102 5-8. Should the stock. while selling in New York at 100 be selling in London at 104 5-8 the normal difference would be exceeded by 2 per cent. The speculator would sell in London at 104 5-8 and buy in New York at 100. Should the price in London drop 2 per cent he would buy in London at 102 5-8 and on the transaction there would make 2 per cent, while he would sell in New: York at 100 and on the transaction there would neither gain — nor lose. Should there be a decline of 1 per cent in London and an advance of 1 per cent in New York in restoring the equality or equivalent in prices there would be a profit of 1 per cent in each place or 2 per cent in the two places. In the back spread there must be le than the normal difference in prices between New York and London. The stock is bought in London where the higher price prevails and is sold in New York where the lower price prevails. Then when the equality is restored the transaction is closed by selling in London and buying in New York. The profit is the amount of the difference that had existed le than the normal difference. For example, when a stock is selling at too in London the equivalent price in New York is 97 3-8. Should the stock while selling in New York at 97 3-8 be selling in London at 98 the difference in price would be 2 per cent le than the f normal difference. The speculator would sell in New York at 97 3-8 and buy in London at 98. Should the price in London advance 2 per cent while the price in New York remained stationary he would sell in London at too and on the transaction there would make 2 per cent, and he would buy in New York at 97 3-8 and on the transaction there would neither gain nor lose. Should there be a decline of 1 per cent in New York and an advance of 1 per cent in London in restoring the equality or equivalent in prices there would be a profit of 1 per cent in each place or 2 per cent in the two places. The arbitrage busine in stocks between New York and London is large. When stocks are bought in New York and sold in London, or are sold in New York and bought in London, the cable is used for the transmi ion of orders from one place to the other. By the clock London is five hours ahead of New York.: When the New York Stock Exchange opens it is 10 a. m. in New York, but it is then 3 p. m. in London. The London Stock Exchange opens at II a. m. and closes at 4 p. m. except on the last day of the account (see Account, The), when it closes at 4.30 p.m. On Saturday 1.30 p.m. is the closing time. After the closing of the London exchange the busine in American stocks continues in the street, in Shorter’s court. In this street market a good part of the arbitrage busine in American stocks is conducted. Very little arbitrage busine is transacted in New York before the opening of the New York Stock Exchange. The most that is done is to send orders to London for execution. No orders are executed in New York until the New York Stock Exchange opens for the reason that there is no street market in New York. For another thing it is too early in the day. When the London exchange opens at 11 a. m. it is only 6 a. m. in New York. The London brokers remain in Shorter’s court as long as there is busine to keep them, but ordinarily they cease dealings at 5 o'clock or soon after. They seldom continue transactions later than 6 o'clock. The orders sent from New York to be executed in London and those sent from London to be executed in New York are “rushed” by the cable companies, for it is a profitable busine for the companies. It takes very few minutes to effect an arbitrage transaction by cable. It is the effort in arbitrage dealings to balance transactions each day—that is, to sell as many stocks as are bought or to buy as many stocks as are sold. When the selling exceeds the buying the exce selling is designated as selling on balance; when the buying exceeds the selling the exce buying is designated as buying on balance. The next day, if po ible, the discrepancy is adjusted. Sometimes arbitrage transactions in stocks cannot be evened _ up in the usual way and stock certificates have to be shipped ‘to effect an adjustment. - { ‘ There is arbitrage in grain, cotton, coffee, etc., between different markets in one country or between a market in one country and a market in another country the same as in stocks between New York and London. For examples see Spread; also see Back spread. The term arbitration is more commonly used than arbitrage in reference to operations in exchange that are based on differences in prices between different markets. For information see Arbitration of exchange. 30