Stories of the Institutional Past #13

Arbitrage & Greed

Arbitrage, as we know it, is a financial strategy that involves exploiting price differences of identical or similar financial instruments on different markets or in various forms. It's a practice revered for its promise of risk-free profit, at least in the ideal sense. Yet, odd things tend to happen when the principles of arbitrage extend beyond the trading floors and into the personal lives of those who are supposed to champion financial prudence.

I get it; we, as investors, spend an insane number of hours in front of screens trying to squeeze out profits from moving markets. It’s a highly competitive multi-player field where people would do nearly everything to get an advantage or exploit anomalies.

I have witnessed a few seasoned professionals fall into the trap of trying to “arb” the smallest things in the real world. I observed, for example, a few people (all men) just taking little things in a cafeteria and walking out without paying for them. They might be busy, but where is someone’s moral code? Do they think they are making so much money that a little snack bar won’t matter much? Maybe. Or is it the insatiable desire to always win the game, no matter what? It is a slippery slope. Every professional investor is held to his or her highest standards. Regulators would take notice if you had a criminal record or acted inappropriately.

Source: Dall-E

I once worked at a large asset manager, where a senior risk taker was suddenly fired. Everyone liked him, and his performance numbers were excellent. Turns out that he dodged rail fares over several years. He ultimately got caught, and even the British press made an example out of him. Anyone remotely knowledgable would say that his “trade” was insanely stupid risk-reward. He ultimately paid for it by being fired and banned by the regulator for life.

When I started in the finance industry, I encountered a few weird situations, especially with seniors. In my first role, my boss was leaving, and I was doing the rounds collecting money for a present. I passed by a senior MD’s office and asked him directly whether he would contribute. He signed the card but hushed me out of his office, claiming that he would give me the money later. I chased him several times without luck; he always had an excuse. When it came to my boss’s leaving party, he was the loudest, most obnoxious idiot in the room, eating and drinking at someone else's expense. That moment taught me an invaluable lesson. Whatever money you make, don’t lose your freaking morals. Never.

I am sure you have encountered everyday chancers along your journey. There is a particular crafty one showing up occasionally on my substack timeline. He has been rolling several trials on my paid-for content, using a slightly different email address by adding a different number at the end. His payment method fails every single time. Stripe has actually identified his methods to me, indicating that this might be a well-known problem. I get it; not everyone can fork out a certain sum of money for content these days. Rather than trying your cheating craft, why not try to contact me and explain your situation? Honesty, my friends, always wins. I have a few subscribers who told me about their life stories and whether I’d consider a discount. I often oblige because I want to be fair and help where I can. Trying to cheat your way to a better position is the worst possible risk-reward you can take.

The allure of arbitrage, with its promise of risk-free returns, is undeniable in the financial world. Yet, as my anecdotes reveal, the principle's application in personal conduct not only fails to yield the same benefits but also incurs severe and often irreversible costs. The pursuit of minor gains or advantages, driven perhaps by a misplaced sense of cleverness or entitlement, can lead to significant professional and personal repercussions.

This paradox serves as a poignant reminder that the principles guiding our professional endeavours — rigorous analysis, strategic foresight, and, above all, integrity — must also inform our personal decisions. The true measure of success in finance, as in life, isn't merely the accumulation of wealth or the mastery of market dynamics but the adherence to a moral compass that steers us clear of folly and toward genuine respect and professionalism.

Let this serve as a reminder for finance professionals and everyday individuals alike: to recognize that the greatest arbitrage lies not in exploiting the system but in elevating our conduct.

Yours in pursuit of integrity and genuine success,