Telecom Arbitrage

Categories: Trading

In a broad sense, arbitrage works by stepping between two markets where the same good or service has different prices.

You notice that you can buy hot dogs in Ohio for $5 a dozen and sell them in Indiana for $6 a dozen. As long as you don't spend the equivalent of $1 a dozen on transportation, you make a profit on the deal.

With that general definition in mind, long-distance international calling should seem like an area ripe with arbitrage opportunities. Lots of different markets and jurisdictions. A product that doesn't really need to be "transported."

Here's how it works: telecom providers give access numbers to their customers, allowing "free" international calling. They then allow their customers to tap into international long-distance networks. However, the calls still burn through the customers' own minutes restrictions. You get 500 minutes a month under your cell deal. You call your sister in Honduras for 100 minutes, using those "free" international minutes. Now you only have 400 minutes for other calls.

As it turns out, for some of these international calls the cost per minute is less than in many domestic markets. So the telecom company makes more by giving these cheap minutes "free" and letting their customers eat up the (actually more expensive) domestic minutes on their call plans. They can then sell the customers re-up minutes for additional dollars. ("Hey! You've reached your minutes limit for this month. But for an extra fee, you can buy 500 additional minutes...")

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Finance: What is Arbitrage?22228 Views

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finance a la shmoop what is arbitrage? not yourbritage or mybitrage but

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arbitrage what it's been a while since we conjugated anything around here oh ok [Man talking about arbitrage]

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so moving on arbitrage is a riskless trade you make guaranteed profits just

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for being on top of things or in the right place at the right time or you're

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there when opportunity comes a-knockin think about the stock exchanges in the [Men working in stock exchange]

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pre-internet era around the world communication well it was relatively

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slow and expensive back then especially when it came to sharing data one [Man talking into olden microphone]

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relatively easy arbitrage or riskless trade opportunity that came about was

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when stocks traded at one price on the various european exchanges versus the

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prices it traded at on the US exchanges like shares of IBM might have been [Share price graph of IBM]

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offered for sale at $165 32 cents on the london stock exchange even net of

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currency conversion prices remember the Brits were on the pound system but in

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the US investors were paying $165 47 cents a share

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so an easy 15 cents a share was made all day long in buying the shares of IBM in

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London and then just selling him back here in New York well both sides of the

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trade were made at the same time it was riskless it was arbitrage and arbitrage

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became a whole industry for a while until the capital markets went to work

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and spreads tightened as communication got more liquid and people sprayed a [Spreads word becomes narrower]

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bunch of wd-40 on information passing around the world and then that 15 cent [15 cents transfers from US to England]

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spread from London to New York became more like a penny or a tenth of a penny

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or at least close enough of a spread so that it was no longer worth bothering to

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try and make a buck or a billion whatever those arbitrageours made in

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those days

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