Once you make the plays and figure out the charges, it's fairly obvious why price differences between these two markets can persist. Recall that it isn't easy to set up the accounts in the first place.
I sent AUD$1000 to BetFair. They took a 1.5% credit card fee out of that. I put $1000 on Mitt Romney to win at 4.4 [I had a standing account balance]. If I win at BetFair, they charge a commission on winnings. Since I do not trade frequently, I get no discount on that. So if Romney wins, BetFair will take 5% of my winnings. This adds up on an arbitrage play.
I sent USD$3020 to InTrade. They took $20 to clear a negative balance that was sitting there. InTrade charges a $4.99 monthly fee to keep an account and recently changed the rules so that dormant accounts of zero balance are not charged fees; it was simpler for me to pay the $20 than to set up a new account. I'll just have to remember to withdraw everything from my InTrade account when the play is completed so that it doesn't just erode back down to zero. But I'm going to count that $20 as part of the cost of the overall play. InTrade charges zero fees other than the monthly trading fee. Fortunately, InTrade underprices the candidate who is likely to win. I bought 448 shares of Obama at $6.69 per share.
The tally thus far [updated with a couple of corrections]:
|Position||$1,000 AUD + $2,997 USD||$4,034 USD|
|Account Fees||$15 AUD + $20 USD||$36 USD|
|If Obama wins (gross)||$4,480 USD|
|If Obama wins (net of costs above):||$410 USD|
|If Romney wins (gross):||$4,400.00 AUD|
|Less 5% charged on winnings:||$4,230.00 AUD|
|Net earnings if Romney wins:||$318 USD|
I'm unfairly charging the $20 fee against InTrade. But once you put in the 1.5% credit card fee and the 5% tax on winnings, it's not hard to justify a reasonable price spread across the two markets. So my earlier tweet was wrong - in particular, it missed the 5% winnings tax at BetFair. If Obama wins, I'll do well. If Romney wins, I won't lose anything except my time.
So why does the price spread across markets persist?
- It's a hassle to set up accounts
- BetFair's tax on winnings limits arbitrage opportunities.
Note: I do have some unhedged currency risk: if the USD/AUD exchange rate moves substantially against me, or if the NZ dollar appreciates substantially against either, I could in some worlds lose a bit. Suppose that a surprise Romney win makes the Australian dollar tank against the US dollar. My winnings in Oz, converted to US dollars, won't look so nice.
Update: I switched to offloading Romney risk onto iPredict, New Zealand's election stock market. It's thinner than BetFair, but if you put up a big order, it might be picked up. And iPredict's tax on winnings is lower than BetFair's - 2% withdrawal fee if you have positive earnings.
Current position then is:
- +2114 Romney at iPredict at $0.24 ($NZD, mix of long Romney and short Obama)
- +670 Obama at InTrade at $6.71
- $1000 on Romney at 4.4 at BetFair.
- Currency exchange risk: If the US dollar tanks on an Obama win (exceedingly unlikely), I'll take a hit; if the Australian dollar tanks on a Romney win (exceedingly unlikely), I'll also take a hit. Or, if exchange rates just happen to move substantially between now and settlement. The $NZ is relatively high now though - it would be surprising if it spiked upwards.
- If the bank's spread on exchange rates is wide enough, 2% gains on a Romney win turn quickly to zero percent.
- iPredict isn't a perfect hedge: the other markets pay off on Obama and Romney; iPredict pays out based on which party wins.