After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.

We had an unexpected interstate visitor this week and although he suggested something else, I secretly suspected that he only came to try out one of my tomahawk steaks.

He was special, but not that special!

So he got some of our grass-fed premium rump steak, which I had recently picked up from my butcher, after a bit of ageing in his glass-fronted cabinet thing.

As the evening went on, our conversation led on to Bitcoin and I asked him if he had set himself up to arbitrage his holding between the different exchanges that exist.

He said he had heard of the term arbitrage but didn’t fully understand what it meant.

I had one French trader working with me once, who would exclaim ‘Le arbitrage’ and wave his arms around in the air, whenever he had nailed an opportunity that had come across his screens.

He reckoned that the term in French meant umpire or referee, though we just knew it as a ‘price difference’ between the exact same stock which was listed on one or more exchanges.

I explained to our guest that ‘arbitrage’ was the term used when one could lock in an instant profit due to a pricing mismatch.

Bitcoin is a prime example of how you can arbitrage a situation, as in crypto land, there are many different exchanges and therefore, many different buy and sell prices shown for the exact same Bitcoin at the exact same time.

In simple terms, if you could buy one Bitcoin on one exchange and simultaneously sell that same Bitcoin on another exchange for a higher price, then that is an arbitrage.

If you can do this, then you have become ‘Le arbitrageur’ as my French colleague would write down on the back of a drink coaster after one too many red wines in the pub. Most of us knew it without the ‘u’.

Normally his antics would be replied with ‘All right frog’s legs, all right. We understand. Now get the round in, you French git’.

On his birthday, we would all wear a French beret to work, hang onions around his terminal and leave a bit of smelly brie on his dealing pad.

You couldn’t get away with those antics in the office these days but as my old boss would say, the French and English would always be in a long term ‘love-hate relationship’.

‘Those frogs all love themselves and us Brits hate frogs.’

Around the world in 80 paydays

I came across said Frenchman and a few other foreigners when I would need to buy some overseas traded shares for a client.

At the time, my firm had a whole desk set up and it was officially called the ‘Arbitrage Desk’. They literally had a relationship with brokers around the world and all the exchanges that they represented.

There were maybe 15 to 20 of them screaming out at each other all at once, though one particular girl, Annie, was normally their target.

Annie was in charge of FX (foreign exchange) and the various traders would be shouting instructions at her to buy or sell a certain currency, so they could lock in their ‘Le arbitrage’ and avoid any slippage.

She was very efficient and could understand all of their languages and accents and very rarely made any mistakes.

She also drank like a fish, smoked like a chimney and kept all the egos in check.

So, if I wanted to buy or sell anything on an overseas exchange, the arbitrage desk would handle the transaction and also cover off the FX side, as at that time, all of my clients would want settlement in sterling (£).

Even if you had an order to sell a stock and switch the proceeds into another stock and both were trading in the same currency, the client’s contract notes would always show a slightly different exchange rate.

One rate would appear on the buy contract and another slightly different rate would appear on the sell contract, even though the switch in reality just needed a little bit of currency netted off.

For example, if you had an order to switch some IBM into GM (General Motors), both contract notes would be shown in £ rather than US$.

Being good brokers we always made sure that the sale proceeds came to more than the purchase required, so you didn’t need to trouble the client for a cheque.

In fact, the correspondence would say something to the effect that ‘as per your instructions, we have switched your IBM holding into GM and we enclose the contract notes plus a cheque with the monies left over. Enjoy your holiday.’

Everything was done in a cordial manner but what no one really twigged to was that Annie was able to internally book a profit on the trade as well as us making commission.

If the sell transaction brought in US$51,000 and the buy was for US$50,000 then all Annie really had to do was convert the difference (US$1,000) from US$ into £.

However, Annie would then take the rate at which she covered off the difference, split it into a buy and sell rate and charge the client one rate on the whole US$51,000 and a different rate on the US$50,000.

That way she had created for her book a perfect arbitrage, as even though she only had to cover off on the US$1,000, the client got charged two different exchange rates over the whole amount.

She could easily make £300,000 a month internally for the firm risk free and our holidaying client would be none the wiser!

Alcohol makes everything simpler

In those days, everything was phone based. Basic prices and rates were shown on monitors and were guides only. It wasn’t until you got a reporting back that you knew what price or rate you had locked in.

With Bitcoin though, it is electronically quoted and has a few variants. I watch it in A$ and as I type it’s showing A$56,966 (-3.46%) whilst in US$ it’s showing US$36,462 (-3.86%) and the difference in the falls is because of the exchange rate fluctuations.

On various crypto exchanges you could easily spot the arbitrages but to take advantage of them would take real effort and determination.

Firstly you would need an account with each exchange. Secondly, you would need to leave capital at each exchange, so you could instantly buy and thirdly, you need the ability to borrow some Bitcoin, so you could instantly sell it.

This is what Samuel Bankman-Fried (born 1992- a baby) was meant to be doing with all of the billions of dollars that he raised.

A simple arbitrage, although actually very complicated and expensive to set up.

My guest and I concluded at the end of the night that probably the best arbitrage he could do is to buy some good wine from wine auction sites (a case at A$5.00 a bottle for a wine that retails at A$40 a bottle) and then list it in his up and coming restaurant at say, A$65 a bottle.

I told him I could always lend him the odd case from the cellar and he could cover it off and have the auction house deliver the same wine back to me, to cover off the loan.

And the name of the new restaurant which will specialise in paddock to plate and cellar (via auction houses) to glass?

‘Le Arbitrageur’!


The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at [email protected].

Feel free to contact him with your best stock tips and ideas.