This one time, I tried to arbitrage used video games for new video games, but I ended up wasting $40 and got stuck with 20 useless Xbox 360 games no one wanted. Recently, I arbitraged Royal Bank stock in a move called Norbert’s Gambit and converted $5,072.60 USD for essentially no cost. But that’s an outlier outcome. You usually end up paying $19.98 and the spread between the inter-listed stock. But that’s still a fine deal since you usually pay 2.1% in FX fees. But let me tell you about that time I ended up embarrassingly losing $40 and getting stuck with useless video games instead. Doesn’t that sound funnier?
Exactly last year, Best Buy had this promotion for new Xbox 360 video games where if you came in on 3 certain days, you could trade in your crappy old Xbox 360 game for a brand-spankin-new game. These new games had a retail value of +$50. I saw $ $ in my eyes. I thought to myself, “I can go to the used video game store, buy a bunch of cheap, old Xbox 360 video games, and then arbitrage those for the brand new ones and flip them on Craigslist/eBay for profit!”
Delusions of Video Game Arbitrage
I had it all figured out. I would buy 20 used games for $2 a piece and then trade them for the new ones over the 3 days and reap profit. I calculated, if all things went smoothly, my initial $40 investment could turn into a minimum $500 profit.
Oh, how wrong I was.
And just to show you I’m not bullshitting, here is a picture I took of the used video games after I bought them.
I had deluded visions of writing this amazing post about how brilliantly I arbitraged $40 worth of used video games in to $500+ pure profit. Nope.
Instead, I shamelessly brushed my failed arbitrage experience under the rug. These video games were SO shitty they had no re-sale value. I desperately went into a different used video game shop to try and redeem some money back (because I was too embarrassed to show my face in the original used game store where I bought these). The guy at the used video game store laughed at me and said he couldn’t give me money for these because they were so terribly bad. He actually said, “you brought in the worst used video games in the world.” I ended up “distributing” these worthless games around the mall and on my way home. I’m sure someone found value in them.
So what went wrong?
I was cocky and overconfident. I basically misjudged that EVERYONE else had the. exact. same. information. Oh, and everyone had the exact same idea. So when I saw huge lines the morning at Best Buy, I knew my video game arbitrage dreams were over. The line-ups snaked around the store – hour plus minimum to get into the store. That’s when I gave up. Don’t ever delude yourself into hustling for arbitrage when everyone else has the exact same idea.
So that $5,072.60 USD I arbitraged with Royal Bank common stock? Well, I won’t bore you with too many details. Essentially, you can buy an inter-listed stock – for example a stock listed on the TSX and the NYSE – on one exchange and immediately sell it on the other. So if you wanted American dollars, you could buy an inter-listed stock on the TSX for CAD and then immediately sell in on the NYSE for USD.
This can be a money saver because stock brokerages typically charge a ~2% foreign exchange fee. With TD, they charge 2.1%. So when you perform a Norbert’s Gambit, all you are charged are the 2 trading fees and the spread between the stocks on the 2 exchanges at the instant you make those simultaneous trades.
Why did I highlight the word can? Because it’s called a gambit. When you perform this arbitrage, the market can move for you, remain neutral, or go against you. For example, when I performed the gambit, Royal Bank could have gone bankrupt in the 2 minutes it took me to execute the trades. Highly, highly unlikely. But you could never rule it out. Hence gambit.
Anyways, here are some screenshots to show you the process:
First, I bought Royal Bank on the Canadian side for CAD on the TSX.
Then, I sold Royal Bank on the US side for USD on the NYSE.
OANDA tells me that the spot rate for November 13, 2014 is pretty bang on with what I was estimated to receive.
And finally, when the trades had all settled, I was left with $5,072.60 USD in my account.
Pretty close to spot rate. If I had converted my CAD the traditional way, I would have paid 2.1% to convert my $5,745.09 CAD.
That would have cost me $120.65.
By performing the gambit and assuming that small window of risk, I saved myself $120.59. It cost me $0.06 to convert my money from CAD to USD.
Proceed with Caution
I need to issue some warnings.
First, please understand there are risks involved with this type of maneuver, hence the word gambit – proceed with caution.
Second, I performed this gambit in a TD trading account and there have been some major changes with USD accounts: I cannot verify that it works with the new system in place – proceed with caution.
Third, please do your homework, research, and due diligence before undertaking any investing activity – do not construe any of the above as financial advice, proceed with caution.
You can go read up on Norbert’s Gambit all for yourself. For informational and entertainment purposes, of course:
- The Definitive Norbert’s Gambit Forum Thread
- Canadian Couch Potato Guide to Norbert’s Gambit
- MoneySense Guide to Norbert’s Gambit
Remember kids, be it video games or Royal Bank stock: arbitrage with care!