Unusual Arbs

“Money won is twice as sweet as money earned” – Fast Eddie Felson, The Color of Money

My first exposure to arbitrage was while attending school at Virginia. We were bottom of the barrel in basketball all 4 of my years there. At most ACC schools, alumni live and die by their hoops team. My family had season tickets to Wake Forest during the Childress/Rogers/Duncan years, so it was an especially difficult transition. Most students at Duke, UNC, etc have to camp out to get tickets, and then the ACC tournament tickets were assigned by lottery. Not at UVa – all you had to do was walk in and buy a ticket packet (who would want to go see them play?). We would then drive down to Charlotte/Greensboro for the ACC tourney and sell the tickets for a huge markup to rabid fans from other schools, and invariably get free tickets to the play-in game which was an annual UVa-Duke massacre.

Arbitrage has always fascinated me, and is one of the reasons I began leaning towards quant analysis years ago. An interesting application is practiced by a a friend in San Francisco that set up a quant model for arbing NFL betting lines. Rather than the typical arb between sportsbooks, he performed a much more complicated arb that at his request I not elaborate on. What is interesting, however, is that the backtested results revealed only a 30% drawdown. The big problem here is the lack of historical data for these lines. Obviously, drawing conclusions from a small data set is dangerous. He “traded” the model in realtime in 2004, and recorded a 98% return in half a season. Visions of sugar plums and moving to Costa Rica danced through his head.

In 2005, he quickly experienced a 50% drawdown before scrapping the model. Was this a black swan, or merely a statistical property of the system traded at leverage levels he was not comfortable with? He paper traded the model in 2006, and quotes a near 800% return. I’ll update you on the real-time performance in 2007. As an aside, there is a quant (also in SF) that writes a newsletter focusing on sports betting. Check out Dr. Bob’s site here. By the way, did Mark Cuban ever start a betting fund?

I sold a book on Half.com yesterday, and was a bit surprised to see the following instructions from the buyer “PLEASE SEND WITHOUT PRICING INFO OR PACKING SLIP”. While it could be a gift (I pity the soul that bought this finance textbook), I am guessing the “buyer” had already sold the item at a higher price elsewhere, then proceeded to buy the item and ship directly to his buyer. Essentially, he naked shorted the book, and covered with my book.

Does anyone know of, or practice, online book arb? Would like to hear your comments – another interesting arb is the parallel trade of pharmaceuticals in Europe.

Any other really unusual arbs out there?

PS A reader emailed in asking if I knew of a free screener set up for Payout Yield. Does anyone know of a good source for this screen?