Arbitrage is rent, not free money

You join the shorter queue at the supermarket and it stops moving.

The one you did not join starts moving.

There is a kind of trade that is exactly this queue, and it is sold as free money.

Nothing about your decision was wrong. Queues do even out. They even out because other people keep leaving the long one for the short one, and that is the only reason it ever happens. Somebody has to move.

While you wait for those people to move, you stand there and watch the other queue go past you. The person in front of you has something with no barcode on it. You are now a good few minutes into a decision that was correct when you made it.

And once in a while the till you picked is being closed and nobody has said so yet. That queue is not slow. It is finished. From where you are standing it looks exactly like a slow one.

Now the trade.

You take two assets that have been rising and falling together for months. Not the same asset bought in two places. Two different ones, where whatever moves one of them tends to move the other. Today one has run ahead and the other has lagged. You buy the one that lagged and you sell the one that ran, both at the same time. Then you wait for the distance between them to close. You are not betting on the market going up. You are betting on those two coming back together.

That has a name. A spread trade.

And a spread trade is the shorter queue.

The gap can widen before it closes. That is the other queue moving while yours stands still. Your position is worse than when you opened it and your reasoning has not changed at all.

And sometimes the till is closed. Whatever was keeping those two assets in step stopped being true, the gap keeps going and the position keeps making the same argument all the way down. Nothing announces it.

Months of two assets moving together can mean something real links them, or it can mean those months happened to look that way. On a chart they are the same picture.

One question comes out of the shop, and I would want it asked before any spread trade.

Name who has to move for the gap to close.

In the shop it is the other shoppers. In the trade it is whoever has a reason to sell the one that ran ahead and buy the one that lagged, with enough money behind that reason to move the price. If you cannot say who that is, nothing is coming back. You are just standing in a shop.

That is the whole difference between free money and rent. Free money gets picked up. Rent is paid to you for the time you were willing to stand there, and only if you are still standing there at the end.

Which makes the skill in this a much duller thing than it looks from outside. Not spotting gaps. Trading small enough that a widening gap cannot force you out before it closes. Telling a queue from a closed till.

Telling a queue from a closed till is what I am building. Hedgicore, starting with crypto perpetual futures. Most of what it does is not measuring how wide the gap got. It is checking whether those two assets are still moving together at all.

It is in private beta. The waitlist is at hedgicore.com.

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One thing the queue does not capture. In a shop somebody eventually tells you the till is closed. In a market nobody tells you, which is why this has to be checked while you are in the trade and not only on the day you enter.