Speculative operations in this market for foreign account, are, however, the cause of the greatest amount of exchange market activity caused by international security transactions. There are times, as has been said, when individuals and banking houses abroad speculate heavily and continuously in this market, at which times the exchange market is strongly affected by the buying and selling of exchange which necessarily takes place. Such periods may last for weeks or even months, and during all of the time, London's immediate attitude toward the market is apt to be the controlling influence on the movement of exchange rates.
Concerning arbitraging in stocks, operations of this kind will be found to divide themselves readily into two classes—trades which are closed off at both ends at once, and trades which are allowed to run over night or even for a day or two. The former is a class of business out of which a dozen or twenty well-equipped houses in New York are making a great deal of money. With an expert "at the rail" on the floor of the New York Stock Exchange, and continuous quotations as to prices on the various stock exchanges in Europe coming in, these houses are in a position to take advantage of the slightest disparity in prices. The chance to buy a hundred shares of some stock, in London, for instance, and to sell it out at the same time in New York, at one-eighth or one-quarter more, is what the arbitrageurs are constantly on the lookout for. With the proper facilities, an expert, in the course of the hour during which the London and New York Stock Exchanges are simultaneously in session, is often able to put through a number of profitable trades.
Such operations are possible, primarily, because of the fact that the same influences affect different markets in different ways. A piece of news which might cause a little selling of some stock in London, for instance, might have exactly the opposite effect in New York. With the wires continually hot between the two markets and a number of experts on the watch for the chance to make a fraction, quotations here and abroad can hardly get very far apart, at least in the active issues, but occasionally, it does happen that the arbitrageur is able to take advantage of a substantial difference. Always without risk, the bid in one market being in hand before the stock is bought in the other market.
But not so in the case of the other kind of arbitrage, where stocks bought in one market are carried over night for the sake of selling them out in some other market the next morning. There a decided risk is taken, the success of the operation depending absolutely upon the judgment of the operator. Under the stimulus of some favorable development, for instance, which becomes known here only after the Stock Exchanges abroad are closed for the day, the New York market closes buoyant. The chances are that the receipt of the news abroad over night will make the London market open up strong in the morning. To buy stock right at the closing of the market here for the purpose of selling it out next morning in London at the opening is an operation not without risk, but one which is likely to make money. A lower opening abroad would, of course, spoil the whole plan, and force a loss, but just there comes in the ability and judgment of the man who is handling the business. His judgment need by no means be infallible for the house to make a great deal of money.
Concerning arbitraging in bonds, practically everything depends not only on the judgment and skill, but on the facilities and connections of the man in charge. In the great "open" market in New York and in the great "open" market in London, American bonds are being continually bid for and offered in a way which gives an expert in touch with both markets a chance to buy here and sell there, or vice versa, at a profit. Such men are employed by bond houses with international connections, and spend their time doing practically nothing else but keeping in close touch with open market bids and offers for stocks and bonds and trying to buy in one market and sell in another. Such trades are frequently put through on a very profitable basis, profits of a clear point or more being not at all uncommon.
As for the degree of risk to be taken in business of this kind, that is entirely at the discretion of the arbitrageur. Where a firm bid of ninety-nine, good for the day, for instance, is given, there is no risk in cabling a bid of ninety-eight to London, but where the bid is not firm at all, or where it is only firm for five minutes, or in many other cases, the man who cables his own bid of ninety-eight is taking a certain amount of risk. Often enough he gets the bonds in London at ninety-eight, only to find that the ninety-nine bid in New York has been withdrawn.
Knowledge of what risks to take and of what risks to leave alone constitutes expertness in this line of business. Seldom can the transaction be absolutely closed at both ends and any substantial profit be made. Most of the time the correctness of the bond expert's judgment as to how he can sell somewhere else what he has bought, is what determines the amount of money he will make or lose.
CHAPTER IX
THE FINANCING OF EXPORTS AND IMPORTS