Information Arbitrage

In the financial markets there is a term known as arbitrage. Arbitrage is commonly accepted as a method by which a financial transaction is carried out where there is a profit without risk. Arbitrage transactions were very a popular in the 80s with traders like Ivan Boesky. Boesky used arbitrage transactions to make millions and perhaps billions of dollars in deals where he would buy the stock of a company about to be taken over. After the takeover would be completed, Boesky would sell the stock and thereby make a huge profit. We later learned that Boesky’s deals were not really legal as he seemed to use information he had gained from company insiders to place his arbitrage bets.

Today arbitrage transactions still remain mostly in the finance arena. Institutions use arbitrage to buy a commodity or security at one price when they become aware that the same commodity or security can be sold in another market at some small profit. Such transactions require speed, low transaction costs, and access to legal information. This final component of today’s arbitrage transactions, legal information, is what I want to talk about.

We live in what some social scientist may someday refer to as the age of information or the age of knowledge. Our society has moved from a time in the 1500s when information was held in the control of an elite few, to today when a young child can perform a Google Search and acquire all of the information available around the globe on almost any subject. There is a certain equity that has developed today in that anyone with a free library card has access to documents and information that was heretofore beyond our imagination. Yet while access is free, we see so few people that avail themselves of this unlimited resource. I believe that it is this very phenomenon which has created modern arbitrage opportunities that we can now call “information arbitrage.”

In my work as a consultant I am an information arbitrageur. The majority of my work results in my obtaining information from one source, and in turn selling that information in the form of knowledge to another source. Within the areas of my expertise, the opportunities are endless. As I continually obtain information the available sources for the sale of that knowledge grows. However, in order to become an effective arbitrageur, you must learn to continually ask the question “how can I use this information?”

Information arbitrage is not new. I can recall my mother using information arbitrage when I was a child. She would scan the various sale sheets that arrived at our home each week in order to determine which of the local grocery stores had the best prices say for ground beef, breakfast cereal, or a five pound bag of potatoes. She would use these markets to purchase those items that we routinely used, and would then “offset” her profits to buy an item that she wanted to purchase for her. I see similar transactions on eBay. The apparent price variations or commodity availability around the country has created entrepreneurial opportunities for sellers. A seller in New York can purchase an item on sale in Manhattan, and in turn sell that item to a buyer in Idaho. The arbitrage opportunities are even greater for so called “must have items” where consumers are willing to pay above the market price to purchase something today that they might not otherwise get. These arbitrage opportunities include everything from the hottest concert tickets, to designer clothing.

In all of these cases someone is taking advantage of the vast sources of information that exists in our society. Information arbitrageurs are using this information to make profits from their knowledge. In this information and knowledge age we each have a chance to become arbitrageurs. We must increase our awareness of the world around us and begin to process the information we gain in our every day life. New ideas gained from conversations with friends and peers create arbitrage opportunities. A casual conversation with the postman can yield new knowledge that you can arbitrage in some way. A visit to your local grocery store or coffee shop brings to you new knowledge that has value. The key is to be on the alert for this knowledge, and to ask “what can I do with this information?”

Information arbitrage will not make you as wealthy as an Ivan Boesky. But if you begin to pay attention to information arbitrage opportunities, you will increase your knowledge and your value. And who knows, you might even save a little money on your purchases, and maybe even identify that next fashion trend that will make you an internet tycoon. The information is all around you. You only need to look and listen.