2 Case Studies in Arbitrage

norberts gambit tdThis 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.

norberts gambit td

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.

Norbert’s Gambit

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:

norberts gambit td

First, I bought Royal Bank on the Canadian side for CAD on the TSX.

norberts gambit td 2

Then, I sold Royal Bank on the US side for USD on the NYSE.

norberts gambit td 1

OANDA tells me that the spot rate for November 13, 2014 is pretty bang on with what I was estimated to receive.

norberts gambit td 3

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:

  1. The Definitive Norbert’s Gambit Forum Thread
  2. Canadian Couch Potato Guide to Norbert’s Gambit
  3. MoneySense Guide to Norbert’s Gambit

Remember kids, be it video games or Royal Bank stock: arbitrage with care!

  • My broker offers spreads of 0.005% or less on forex spot prices. The rate is so low because they charge a small commission. For me to buy $25k USD, that commission would cost a whopping $2.27.

    I suppose I could arbitrage a stock to do it, but the commission would be more like $4-5 for 25k of RY shares. (for BOTH trades!)

    • That’s a great deal – don’t think these big lumbering banks will ever offer those kinda rates because it’s such a cash cow for them! Things have changed at TD with the new USD accounts so not sure what I’ll do to get my USD 😛

      Could try arbitraging video games again and then turning those profits into USD…. 😉

  • Norbert’s Gambit is great when you’re converting a large amount of money. If it’s only a few hundred dollars it’s not really worth it, you may end up paying more for the commissions.

    • I think you need at minimum $1000 before it becomes worthwhile and of course the more money you NG, the better the savings. But not many people might have the confidence to gambit tens of thousands of dollars. Thus the gambit I suppose 🙂

  • Matt

    The Video Game Arbitrage could’ve worked for rare games, limited edition ones. And the Norbert’s Gambit’s pretty useful. Didn’t know that. Thanks.

    • My blunder was that I got so excited and emotional that I forgot to truly assess the situation and understand that I wasn’t acting on privileged information: everyone else knew about this too so I wasn’t going to have an advantage, which was why I ended up with so many useless video games 😀

  • Haha, I used to do the video game trick all the time, but just one game. Go in one store to buy a €1 second-hand FIFA game, then trade it in at another store to get €20 off on a newer title. Rinse and repeat every time I finished my games. Now I have a big collection of excellent PS3 games at a fraction of the original cost. 🙂

    (After a while the clerk of the second store found it odd I always returned the same FIFA 2008 game, so they shut me down.)

    Have a great weekend, pal!
    NMW

    • Wow that is a MUCH better use of video game arbitrage time than what I wasted time on!!

      HAHA amazing that the clerk finally figured out your system – that made me lol for reals.

      Nice seeing you around NMW!!!

  • I love a good Arb.
    Come from a sports gambling background myself and used to take advantages of arbing prices between bookmakers. As No More Waffles mentioned in his arbing scheme, they quickly catch on and shut you down so unless you are getting big bucks down, it’s not usually worth it, and there is normally inherent risk (even if a small one) in any kind of arb opportunity (otherwise everyone would be doing it!!!!)

    • What I recall vividly from living in London was the amount of sports betting houses around every corner! It was so foreign to me because things like that don’t exist here in Canada. Never went into one but I will definitely go amuse myself next time I’m in the UK. I will also track you down and buy you a pint of bitter too!

      • Ha ha, they are not great places to visit to be honest but I guess it’s one of those weird “you gotta see it once” type of things.
        Basically it’s just a load of old/obese men sitting around smoking and having a punt on the afternoon Dogs at Walthamstow or the Horses at Cheltenham. Maybe they’ll pop out once in while to get a can of super strength lager. Ahhh I love England 🙂

        I am (was) an online betting only man myself!
        Pint sounds good to me though! 🙂

  • Ha! My brother-in-law owns a video game store and loves guys like you. He buys games for a quarter and turns them around for a few bucks. People complain about only getting minimal money but some games just aren’t worth anything. On occasion some parents bring in a whole collection of games and he makes hundreds off of parent knowing nothing about games. Some games are very valuable online. You might want to try that. They make as much online as they do at their store. The store is mainly used to get people to trade in their stuff. You don’t make six-figures a year in used games by getting taken by customers.

    • “he makes hundreds off of parent knowing nothing about games” reminded me of that Simpson’s episode where Millhouse’s mom takes all the original Star Wars memorabilia to Comic Book Guy and gets like $20 for it all 😀

      Haha my video game arbitrage days are over – it was a $40 lesson in not to attempt speculation in something I know nothing about 😉