Garbatrage
Categories: Trading, Company Management
In our home country, Shmooperica, domestic automakers were more like auto-“meh”-kers. No matter what they did, they couldn’t seem to compete with car sales from places like Japan and Germany; when buyers were asked why they prefer foreign cars, they cited everything from looks to price to safety features to fuel economy. This was awfully troubling for Shmooperica’s automobile manufacturers.
But then, one day, RapidChow, one of the country’s most successful fast food restaurant chains, makes a surprising announcement: they’ve acquired GoGo Motors, Inc., Shmooperica’s largest auto manufacturer. And before they can really even tell the world what they plan to do with their new acquisition, GoGo’s stock price starts rising and the number of shares being traded increases exponentially. Then, soon afterward, the stock prices of other domestic auto companies start rising as well.
What’s going on here? RapidChow only bought GoGo Motors, so why are these other companies’ stocks rising?
Well, there’s a name for this phenomenon—it’s a garbatrage.
“Garbatrage” is what happens when an industry sees its stock prices and trading volume go up as a result of an acquisition by a company not in that industry. This flurry of activity is totally psychological: investors see one big change happen (like a fast food chain acquiring a car company) and start speculating about what other kinds of big changes are coming down the pike. There might not actually be any physical evidence that any other changes are coming, though, which is why “garbatrage” is also called “rumortrage.”
We love a good portmanteau as much as the next person, but merging words like “garbage” and “rumor” with “arbitrage” makes us question how seriously we should take those kinds of speculations.
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Finance: What is Arbitrage?22228 Views
finance a la shmoop what is arbitrage? not yourbritage or mybitrage but
arbitrage what it's been a while since we conjugated anything around here oh ok [Man talking about arbitrage]
so moving on arbitrage is a riskless trade you make guaranteed profits just
for being on top of things or in the right place at the right time or you're
there when opportunity comes a-knockin think about the stock exchanges in the [Men working in stock exchange]
pre-internet era around the world communication well it was relatively
slow and expensive back then especially when it came to sharing data one [Man talking into olden microphone]
relatively easy arbitrage or riskless trade opportunity that came about was
when stocks traded at one price on the various european exchanges versus the
prices it traded at on the US exchanges like shares of IBM might have been [Share price graph of IBM]
offered for sale at $165 32 cents on the london stock exchange even net of
currency conversion prices remember the Brits were on the pound system but in
the US investors were paying $165 47 cents a share
so an easy 15 cents a share was made all day long in buying the shares of IBM in
London and then just selling him back here in New York well both sides of the
trade were made at the same time it was riskless it was arbitrage and arbitrage
became a whole industry for a while until the capital markets went to work
and spreads tightened as communication got more liquid and people sprayed a [Spreads word becomes narrower]
bunch of wd-40 on information passing around the world and then that 15 cent [15 cents transfers from US to England]
spread from London to New York became more like a penny or a tenth of a penny
or at least close enough of a spread so that it was no longer worth bothering to
try and make a buck or a billion whatever those arbitrageours made in
those days