Hedge the casino…

Posted by on Apr 19, 2012 in ArbMaker News! | No Comments

An article reproduced with permission from Capital Chronicle featuring ArbMakerPlus screen shots.

“It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive”

When JM Keynes wrote that in The General Theory of Employment, Interest and Money it is certain he was not on the lookout for a gap in the market in order to create a gambling service for every pocket.

 Still, the more famous casino quote from chapter 12:

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”

does rest on likelihood not certainty. So with this allowance for even improbable outcomes Mr. Keynes perhaps would not be surprised that betting companies have come to resemble capital exchanges. Or miss the irony of a relative value trade hedging the two.

 Here are a couple of graphs showing just how much the London Stock Exchange and the sports betting and gaming company William Hill, plc have become substitutes since the turn of the year.

These are 30 minute intra-day observations from a cointegration analysis going back to mid December 2011. Even after application of the UK’s Tobin Tax Stamp Duty it has been a neutral and profitable trade.

But – and in keeping with the Spirit of the Times – those opposed to transaction taxes on the grounds of principle will side-step the 0.5% by using Contracts For Difference. Sold, in a neat twist, by one of William Hills’ financial market betting company competitors.

For more on Keynes and his investing methods see this excellent recent paper neatly summarised by CXO Advisory Group here.

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