So, writing up a little stock market piece. I noted that the US, OTC, price of a share was wildly out of line with hte London, AIM, price of that same stock.
Then on closer examination that OTC price was the grey market, which isn’t a market at all, it’s simply a record of the last recorded trade price, which might have been weeks, or months, ago. So, no arbitrage.
$100 bills on the floor do exist but not for long.
Which leads to a larger musing. Of course there is arbitrage between, say, ADRs and London stocks. That’s why the prices do move in very near lockstep. The people tasked with creating the ADR itself are asked to move either way, creating or unpicking them, buying or selling at either end, in order to make those prices move in very near lockstep. This happens in large amounts and at very fine margins.
So, what about less liquid stocks? AIM that’s on the Pink Sheets say? It’s possible to imagine – imagine – that the margins are wider here. That’s rather what less liquidity means.
It’s also true that the world is reducing trading margins. Using Transferwise the commission to move $10,000 to £ might be 0.1% with no spread. Robin Hood (and Schwab etc) now have commission free trading.
Which leads to, well, what actually is the price mismatch between such more thinly traded stocks? That will depend upon whether there’s anyone arbitraging institutionally of course. It will also depend upon the details of the nuts and bolts of buying on one exchange and selling upon another. The nitty gritty of proving ownership, of whether it’s actually an ADR and thus some formal change needs to be made to turn it into a London stock, or is it actually the same thing etc.
At which point, well, does anyone know. The real details of these markets?