Greedy Goblin

Tuesday, October 19, 2010

What the harvest can teach us

The great glyph harvest totaled 80K for me. However in the last days I've been selling around material costs, so I'm merely getting back invested gold. If I'd knew how the harvest will be on my server, I wouldn't stockpile more than I could sell on Wednesday and Thursday. But I did not know, right? Other scribes are banging their head to the wall that the glyph prices are still 30+ and they ran out of stocks. How could we know?

We couldn't! I'd like to talk about over-time-arbitrage. Some call it investment, but every kind of business activities need investment, so that name is false. But before that, let me talk about all the other moneymaking activities. Luckily, each and every one of them is present in WoW:
  • Unskilled labor: you change your time into items that you sell on the market. Farming herbs or ores for example. It usually doesn't need conscious investment, I mean that you have everything it needs simply by living (like farming in Sholazar needs a lvl 77+ but you get one by normal play, you don't have to go out of your way to get one). After a little practice you can see how many items you can get in an hour. Multiply it by market price and you get G/hour. The market price is obvious as you do sell immediately. Other players entering your market will increase the supply and therefore pushing down the prices. This effect is visible and you can quit when profit is too low, losing nothing.
  • Skilled labor: you invest into getting some skill, like leveling a tradeskill and getting recipes. You buy materials for market price and sell the crafted item instantly. Both prices are exact as trades are realized at these prices. Competitors who buy materials higher or sell products lower change the market prices, limiting your profit chances. If the profit is too low, you can quit anytime. You only lose the already sunk cost of learning the skill, but actually you did not lost it completely as it enables you to re-enter easier than a new player would enter.
  • Spatial arbitrage: you invest into buying items here and sell it there. Transporting between the alliance and the horde, or remote vendor and AH are obvious examples. The more people transport, the profit expectations will lower, however you can always clear your stockpile at least for purchase cost (if you sell for vendor price, no one will undercut you, or if he does you can buy him out and slowly but surely sell).
What is common in each of them is that the profit expectation is clear and known to all players. The first to quit will be the one who expected the highest profit. Then the one with the second highest expectation will drop out, and it goes on until the supply provided by the remaining players reaches the demand and the profit stops to decrease. Since profit expectations depend on your performance costs (labor costs, labor efficiency), we can say for sure that the more productive will win over the less productive. Also, the end-user is immediately present as the buyer. The decreasing prices made by competition serves him, and since most people buy stuff, we can say that "competition serves the mankind".

Arbitrage-over-time means you buy items now and sell it later. While competitors obviously decrease your profit, you don't see them in the investment phase and you cannot segment your investment phase. I mean if your plan is to transport recipes from a distant vendor to the AH, you can see all your competitors selling in the AH. If you are unsure about the profitability, you can buy just a few items and restock when these are sold, minimizing the risk of having your wealth in slowly selling stockpiles. On the other hand if you are buying herbs now, to sell them after a patch, you can't see how much your competitors stockpiled. You can't stock just a little and get more when you sold these as it would need time travel. You also cannot "just quit" as all your investments are sunk costs. You can't time-travel back to sell them for the value you got them. You must clear them for current market price. So:
  • You don't see your competitors until it's too late to do anything
  • They can't see you either so even if you are stronger, you can't expect them to get out of your way
  • You can't compare productivity, so even the most ineffective will believe he is competitive until it's too late to back off
  • And above all: overstocking can mean that items were produced without any end-user need, they go wasted (negative sum business).
So we can come to the conclusion: "arbitrage-over-time is bad". However it still exists and very profitable. Why? Because there are enough morons and slackers to suck up the losses, so this negative-sum action is still large positive for the businessmen. In my example: lot of herbs were turned into inks, rising the flask costs before the patch. Every flask user payed the price for our stockpiling. Now the inks will be turned into very cheap glyphs that bored players will use to complete their glyph set even for glyphs they will never use. The world would be better off if the flasks were cheaper. However I came out positive as the M&S paid 30-50G for a glyph in the first days, filling my coffers, so I'm motivated to do it again, to harm the world again even when I know I'm doing something bad. The morons simply put too much money to the table to make me leave it for ethical reasons.

I hope you realized by now that I'm talking about Lehman papers more than about WoW glyphs.


Note: non-M&S people know what they want, so they can make informed choices where an investor cannot as he can't see into their heads. A player could buy all the glyphs he needed before the patch. The whole system is based on the fact that I know better what the M&S will do than the M&S themselves.

35 comments:

nonameform said...

Some real stuff came up on the patch night and I'm still not back to WoW. I believe I have pigments for around 2K glyphs and that bothers me slightly since the profits you and other people got in the first few days will be much lower by the time when I finally join the wagon. I wasn't gathering mats specifically for the patch, but as a side effect I got plenty of pigments which I tried to sell at first, but the market was so small that I just stockpiled them on my alt and decided to wait until 4.0.1. I will see how it goes later, but I assume that I might need to sell pigments to people who will be leveling goblins in Cataclysm, if the glyph market drops to the pre-Cata price level.

Lilywhite said...

In what way would you be harming the world my stockpiling and selling later when demand is high? I would say you are instead contributing to the server community.

* You provide more glyphs on the AH in times of need, by draining them from a time of less need. Obviously a good thing

* Your actions contribute to setting the price so that those who can wait to get the new glyph will do so, meaning that there will still be glyphs on the AH for those who need it on patch day (but they have to pay more). I would say you have provided a valuable service to your server and you are rewarded accordingly.

You can not simply state that "the world would be better of if flasks were cheaper". Either you are envisioning some kind of Gaia where everything is free and everyone is happy or you have to make a tradeoff. If I understood you correctly, you more or less helped raise the flask price to meet a surge of demand in glyphs. Had you and others not done that, Glyphs would probably have been impossible to come by while flasks would still (at least initially) be as cheap as before the patch. I do not belive that is a desirable situation for 90% of the server population.

Squishalot said...

What you are describing is not 'arbitrage', it is simply 'risky investment', or just 'investment' (since most ordinary investment is risky in some way).

The key difference between arbitrage and risky investment is that arbitrage requires you to be 100% sure that you will make X return. Risky investment is risky - it will give you a variable return, depending on what conditions are when you sell.

For example: agreeing to sell ore in trade chat and buying on AH is arbitrage. Buying on AH and relisting at a higher price is risky investment.

Glyph harvesting is a risky investment. Sure, it offers extremely high returns, with high probability of such returns. But it is still inherently risky (as demonstrated by your overstocking), and by definition, should not be described by the word 'arbitrage', which is taking risk free advantage of the price difference between two markets.

Visalyar said...

Yes, the first days postpatch were the best days of my ingame trading history.
I invested in ~6k glyphs prepatch (got a scribe crafting all of them giving him 2g / glyph + mats) every epic gem i could get under 80g (uncut gems) and turned in my badges into gems (knew from the testserver they´ll get more expensive) same at my honor... ...oh yes and craftet many scroll for enchanting.
I needet 3 Alts (i decidet to do the the glyph buisiness on our alliance side, because they have a bigger player-base) to stockpile up. 2 houres before serverdown i enlisted 30% of my stockpile far over the average price (250%). The first day all of it got sold out. I really got smacked by the gold floating in, the gem market got me so far i bought up stacks from the tradechannel for the next days.
Well yesterday I sold my last glyph and some of the enchants are still enlisted in the ah (made a downfall there) but the gems really kicked me out. I sold about 2,5k gems of all colours.
My total income on alliance and horde is 120k getting my gold back over the neutral ah will cost me ~30k but obviously worth the deal. I´ll shut down my serious buisiness till cata and get into deeper digging about my M&S statistics.
Oh and yes, making high profit must hurt someone but I think we´ll do all this again in the next big run, just as you said. And I don´t feel any guilt, everyone active in the forum or the PTR should have known to buy their glyphs prepatch or when the demand of glyphs seems to be chilled.

Gevlon said...

@Lilywhite: "You provide more glyphs on the AH in times of need, by draining them from a time of less need. Obviously a good thing" The point is exactly that I don't KNOW when will be "times of need". I guess blindly. Maybe I guessed right and I contribute. Maybe I don't. This time I overstocked and so others, making waste.

Lilywhite said...

@Gevlon: And the good goblins guess correctly more often than not. The not so good go out of business and thus waste less next time. Creative destruction happends, on the whole it is a good thing.

Tazar said...

Just to the point of M&S not buying glyphs before patch. I tryed to sell whole set of glyphs for each class 1 day before the patch to see reactions. I did it for very low price of 300g per whole set (about 32 glyphs). For 1 hour of trade spam I've got just 2 sales but a lot of LOL's instead about the patch coming tomorrow pointing out that glyphs will change so there is no point to buy them now.

Sorry no screenshots :(.

Anti said...

"getting my gold back over the neutral ah will cost me ~30k"

move items rather than gold. list an item for 10s (or 1g, 10g) and buy it immediately (from a alt account or friends account)

i moved a lot of weath with promordial saronites. paticularly good because i wanted them anyhow and they were often cheaper alliance side where i wanted to bring wealth over from.

also cheap BoEs are often very liquid assets and can be converted to gold quickly on the destination faction.

Bobbins said...

'as the M&S paid 30-50G for a glyph in the first days'

Please note that patch also gave people gold. The dual spec which was 1000g was reduced to 100g. That was a 900g over which certain players paid. So rather than paying the 1000g pre patch for dual spec before patch you could buy dual spec + 900g spend on permanent glyphs. I'd have prefer that later!

How much did you spend on dual spec?

chewy said...

I have to disagree Squish it is arbitrage since it's playing the difference between two markets in this case pre and post 4.0.1 patch.

Arbitrage does carry risk, maybe not in the classical sense of the word but in how it's applied to today's stock market trading. One risk being that you run out of investment before you realise the profits on the selling market or in Gevlon's case the opposite.

Task said...

@Squishalot and Gevlon

I believe the word you were looking for is 'Speculation'.

Visalyar said...

@Anti: Yes I´ll try it that way. I´m into buying some of the Shadowmourne-Quest Items (mount, tabard, Box etc. got the offer at a neutral forum a few houres ago) I´ll do the ah-switch at 3 o´Clock, don´t want to loose a item to some speedy auctioneer (happy with my 3 accounts). Transferring my gold by reselling promordial saronite is ab bit out of range for the big part of the gold. At the actual prices on our server that would be 48 stacks and I don´t want to sit on 48 stacks of saronite, I´d never get rid of them.

Kurt said...

@squish: "In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value or convergence trades), as in merger arbitrage."--wikipedia

This is the 10 millionth time that someone has attempted to describe a particular kind of investment over time as analogous to arbitrage over time, and the 10 millionth time that someone has piped up "but arbitrage is by definition risk free". Technically, yes, but the essential insight, that predicting the future better than others opens up possibility for something similar to arbitrage, is a good and useful insight.

It is even more applicable when you consider that the people to which Gevlon makes a real world analogy sold these incredibly risky papers as RISK-FREE, due to their flawed insurance based on a flawed risk determination formula derived by an academic--a practical demonstration that the risk-free theories of the academics are not very useful in describing the real world, where there is always risk.

Anti said...

"How much did you spend on dual spec?"

hunter, mage, mage, warrior, pally, rogue, druid, 71 priest.

so 8k. only toon of any significance without dual spec is my 68 DK scribe who is only 68 to get alchemy mastery.

they also all have epic flight. most of them when it was 5k so thats another 40k.

at least half of them paid 1k for epic ground mount too.

but i have money. the only time it was an effort was the first time i had to save 5k for flying. between then and when i decided to go for goldcap i usually had 10k - 30k in reserve.

thanks to glyphmas i now have close too 400k reserve headed into Cata.

The Gnome of Zurich said...

"and by definition, should not be described by the word 'arbitrage', which is taking risk free advantage of the price difference between two markets."

It's pretty common to use "arbitrage" to refer to investments with a very high probability of positive return and a very tiny probability of negative return.

Usually it's modified by another term, such as "risk-arbitrage" or "merger-arbitrage". Everybody realizes (or should) that these things are not arbitrages in the classic sense of pure profit with zero risk, but the fact is that pure arbitrage plays are almost non-existent these days outside of insider trading.

The huge-volume trading done today that comes closest to old-style arbitrage is of exactly the nature of glyph harvesting in wow -- using your knowledge and a massive bankroll to essentially offer insurance in a particular market.

Two companies merge -- there's an implication of the value of the component stocks post-merger that is generally higher than the current price. So there is usually an "almost arbitrage" available by some combination of buying one and shorting the other, or buying both. But the reason the spread exists for more than a split second is that it is not truly risk free! The merger might not go through for any number of reasons. If the market is truly perfectly efficient, then you are really doing nothing different than playing a martingale -- taking a tiny chance of a big downside that does in fact balance the small profit that you make 99% of the time. But if the market is not efficient, and there is a case to be made that in such cases it is not always so, you get some arb profit out of it.

It's hard to know for sure, and the calculation depends crucially on the estimate of how often the merger blows up.

But to some extent, it's an arbitrage.

Even old style arbitrage was never totally risk free. There's always some risk that the price gap closes before you can complete both trades causing you to lose money.

IMO, the key factor that makes something an arbitrage is that some current non-market factor (i.e. being able to move something between two different markets) makes two different market prices not make sense in a way that someone can make a profit off of it.

I think time-arbitrage qualifies when it can be predicted with as much certainty as some of the changes following a wow-patch.

The Gnome of Zurich said...

One thing I didn't see coming was the change in enchant vellums. They are now very cheap to make -- basically you can put any enchant on an armor vellum 1 now, and the rest got converted.

I am wishing now that I'd made fewer weapon vellums and armor vellum IIIs ahead. but I'm *most* glad that my stockpile of weapon IIIs was fairly low. I had a giant pile of ink of the sea and I was intended to convert a bunch to weapon IIIs for my enchanter -- glad I didn't do that. Especially now that ink of the sea is selling for 6-8g apiece in large quantities. With glyphs crashing down to the 10-30g range now and my glyph book not being all that great or well setup, I've decided to sell ink rather than craft a bunch of glyphs right now. I won't bother carfting more glyphs until the post-glyphmas hangover ends and I see which ones are profitable.

Strum said...

re: arbitrage, I agree with Squish that the term is being badly mis-used here.

Saying that you're comparing today's market vs a future market and "arbitraging" between them is just another way of saying that you're investing and hoping/expecting that the price will go up.

The major idea behind arbitrage is risk-free profit by taking advantage of price differences between markets. In practice, you can't eliminate all risk (e.g. counterparty default), but the risk of basic price fluctuations is moves this idea right out of arbitrage and into normal investment/speculation.

Going long on a stock or commodity maybe be a good idea; it may be a very profitable idea. But merely buying up Google or IBM stock to sell in the future is not arbitrage, and neither is what Gevlon describes.

Strum said...

@Kurt: "Technically, yes, but the essential insight, that predicting the future better than others opens up possibility for something similar to arbitrage, is a good and useful insight."

I agree that you can make a killing if you can predict the future better than your competitors, but I see no reason why we should label that "arbitrage", which has very specific connotations, and instead just call it what it is: very good investment opportunities.

"Arbitrage" is thrown around alot, and the concept has a lot of mystique and glamour. But ultimately not every low risk, positive expected return transaction is arbitrage.

Kurt said...

@strum

"The major idea behind arbitrage is risk-free profit by taking advantage of price differences between markets."

For example, the difference between 1 ink per glyph on Monday, and 3 inks per glyph on Tuesday?

"Going long on a stock or commodity maybe be a good idea; it may be a very profitable idea. But merely buying up Google or IBM stock to sell in the future is not arbitrage, and neither is what Gevlon describes."

this is perhaps the worst analogy I've ever seen. Let me ask you...how much gold did you make from glyphmas?

moz said...

Talking about arbitrage, there are 2 possible scenarios for cash flows:

1) you invest zero your own money (=borrow) today and ensure that you have a non-negative payoff in the future.

2) you realize a gain today and ensure that in the future your cash flows cancel out.

Thus, I would also say that this is not a case of arbitrage. It's a risky investment.

Bobbins said...

@Anti
The point was that the patch made it cheaper to get a dual spec so it 'gave' players over nine hundred gold to spend on overpriced glyphs.
The opportunity costs of investing in both dual-spec and glyphs was greater pre-patch.

PS The question was rhetorical but it is nice to know that people aren't too vulgar to mention how much gold they may (or may not) have got.

Daniel Chapman said...

For over a week before the patch I was buying glyphs from my competitors. Then the day before the patch, I bought out every glyph that was priced below 20g.

I got whispers from multiple competitors that I was in over my head, I was taking too big a risk.

Since the patch I've made WELL over 300k gold. No, that's not a typo. That's an honest assessment of how much I have profited from my work.

This is without touching my own inks, and that's accounting for the over 100k that I invested in the week prior to the glyph changes buying out and controlling the market. I got whispers from competitors that perhaps I was investing too deep.

I made an alliance auction character, transferred over about 35k from my horde main, and bought items there. Money on alliance can be used to buy materials and the neutral auction house will allow me to transfer it. (I've done this in the past to buy abyss crystals cheap on alliance, and then made a profit on horde reselling them.)

So, the question, "How could we know?" ... WE KNEW. I did not run out of stocks, the only way I could have captured money is by spending more time buying out low level glyphs.

Now I am spending time looking for big ticket items that will continue to be worth purchasing after cataclysm hits. Every increase in levels will bring an increase in gold earnings. So inflation will make your gold's purchasing power lessen, so invest in a few things now before you find out that 50k has the buying power of 20k or less.

Kurt said...

@strum:

"I agree that you can make a killing if you can predict the future better than your competitors, but I see no reason why we should label that "arbitrage","

Your proposed alternative analogy, to investing in google or apple, is utterly horrible. Massive profit, over a few days, with almost no risk, versus less profit, over years, with more risk. Arbitrage is the closer analogy, because it most closely fits the facts of the matter. Real world analogies, where for example people learn of a natural disaster and move money accordingly, you would call "investment profits"? That is equally nonsensical. They aren't "investing" in anything, they are reacting quickly to news of a natural disaster and engaging in short-term arbitrage to capitalize from it. The sense in which this fails to be arbitrage, is not in that the situation doesn't fit, but that the appropriate tools are not available in WoW for players to properly hedge their actions to eliminate the risk completely, to satisfy the technical, academic definition. Because those tools do not exist in WoW, it it ridiculous to extend academic definitions based upon their availability into this arena.

I.e. if WoW had a futures market and allowed short-selling, then people could actually engage in the activity that you wish to restrict Arbitrage to. Since WoW doesn't, your definitions, and those of the others who have made similar points here, are inapplicable.

""Arbitrage" is thrown around alot, and the concept has a lot of mystique and glamour. But ultimately not every low risk, positive expected return transaction is arbitrage."

Mystique and glamour in arbitrage? What world do you live in? In any case, as I explain above, you offer no better way of talking about the situation, so are easily dismissed.

Strum said...

@Kurt:

I made 40-50k, with 1 posting session a day.

And the analogy is on point. Gevlon's definition: "Arbitrage-over-time means you buy items now and sell it later." That's pretty much the definition of going long. Long in a stock, long in commodities, or long in a glyph: it's buying and owning the item.

People were idiots by buying on Tuesday instead of Monday. Producers were idiots manufacturing on Tuesday instead of Monday. And prices definitely shot up on Tuesday.

All still not arbitrage. Profitable investment opportunity, yes; arbitrage, no.

If you think prices are going up tomorrow, then by all means, buy it now and sell it later and make a pile of gold... just don't call it arbitrage. Predicting the increase in demand and making a lot of glyphs is not arbitrage any more than is predicting a poor wheat harvest and filling your silo. Being Nostrodamus doesn't make you an arbitrageur.

Bristal said...

I think it's interesting that today's post seems to be saying that Goblins make money because they're smart, or they educate themselves and take calculated risks.

However, just after "Glyphmas" your conclusion was that all your customers were M&S and ignorant.

You speculated. You took a calculated risk. You read the tea leaves correctly. Excellent job.

But using your success as evidence to prove that others are stupid...isn't that just being a poor winner?

csdx said...

@Kurt

Also you're conflating vastly profitable with arbitage. How much you make on the transaction doesn't define whether or not it's arbitage. Buying real estate then selling during a housing boom, isn't arbiate no matter how much you make. Versus being able to cash in on variances on stock prices even of only a few cents is arbitage. Scale of profits doesn't matter, the definition only cares about risk.

Kurt said...

@strum:

"And the analogy is on point. Gevlon's definition: "Arbitrage-over-time means you buy items now and sell it later." That's pretty much the definition of going long. Long in a stock, long in commodities, or long in a glyph: it's buying and owning the item."

Buying stock one day, and selling it the very next day, is not the traditional long position. If you buy goods one day in London, and sell them the next in Paris for a different price, taking advantage of the different markets, that is arbitrage, not going long in that good. I think the problem here is the term "arbitrage over time", that's not the term I would have chosen. It connotes that the profit comes from the passage of time, which is traditional investment. The profit in this case happened overnight, due to a change in conditions. "arbitrage over predictable rule changes" isn't quite as succinct, but it's what is happening here. I'm not going to keep pointing out your errors, if you persist in calling holding stock for 1 day, in a world where the traditional commodity futures mechanisms do not exist, "going long in glyphs", I'll just laugh at you in private. The fact that you made 40k on this event only proves that you knew it was sure profit, not a risky investment.

Strum said...

@Kurt:

"They aren't "investing" in anything, they are reacting quickly to news of a natural disaster and engaging in short-term arbitrage to capitalize from it."

Huh? So your proposed analogy is that the 4.01 patch is like a natural disaster? A natural disaster that we had months of notice for? That's an absurd comparison. 4.01 was not some lightning bolt out of nowhere which wrought sudden changes that everyone had to immediately adjust to. Blizz publicized the glyph changes. We had weeks to prepare. Bloggers wrote articles galore describing on what to do.

Stocking up on glyphs and inks in anticipation of a price increase is good investment strategy, not arbitrage.


"Because those tools do not exist in WoW, it it ridiculous to extend academic definitions based upon their availability into this arena."

It is more ridiculous to try to cram what you can do within the game into the term by warping the fairly clear definition. There's no harm in saying that it cannot be done in WoW with the tools available.


"Mystique and glamour in arbitrage? What world do you live in? In any case, as I explain above, you offer no better way of talking about the situation, so are easily dismissed."

Pure arbitrage does have a lot of mystique and glamour- it represents a true "Free Lunch" of positive gains at no risk. It is the gold standard of pure profit. It's a compelling concept, and the label has power- just like calling a big company a "monopoly", or a merger you don't like "anticompetitive". People are eager to slap the "arbitrage" label on things which aren't.

You're sure spending a lot of electrons on something so "easily dismissed." Calling this arbitrage severely distorts the well accepted, financial and economic meaning of the term. The concept of predicting a price change and acting appropriately is so fundamental that it doesn't need additional explanation. It's smart. It's profitable. It's not arbitrage.

Squishalot said...

@ Task - indeed, speculation is the correct word, thankyou.

To those criticising my comments on the use of the word 'arbitrage':

This speculation is not risk free, and is nowhere near 'low risk'. If it was 'low risk', Gevlon would have had a low probability of having excess stock, along with everyone else on the server who was playing the market. Otherwise, you would have to argue that anyone who buys things on sale and sells them on eBay are arbitrageurs - they're not!

'Arbitrage-over-time', without fixed prices and/or volumes, is not arbitrage. As Task said, it is simply speculation. The US dollar is at historically low levels at the moment. You can buy US dollars now, because you know they're underpriced, and are highly likely to revalue upwards once the US economy picks up again.

Is this 'arbitrage-over-time'? No. Is this speculation? Hell yes.

@ Kurt: "Technically, yes, but the essential insight, that predicting the future better than others opens up possibility for something similar to arbitrage, is a good and useful insight."

Buying low and selling high, being better at predicting the future will help you make profits. Thanks for the protip. You can probably get an MBA with that sort of insight!

Really though, that's plain useless. It's repeating garbage that everybody knows - if you have perfect knowledge of the future, you can make money. That's not insightful, that's bloody obvious.

@ Zurich: "The huge-volume trading done today that comes closest to old-style arbitrage is of exactly the nature of glyph harvesting in wow -- using your knowledge and a massive bankroll to essentially offer insurance in a particular market."

That's not true. As I said, old-style arbitrage is to sell things in trade that you're buying off the AH in real-time and profiting off the two different markets. The glyph market is like an international steel mill buying iron ore (herbs), converting it into steel (glyphs) and onselling to people who need it. While it can be profitable, you can also make significant losses if your steel/glyph demand dries up, because you're stuck with raw materials and inventory that are worth less than cost price. It's not arbitrage. It's just business.

Real-world arbitrage still exists and still occurs. Some forex traders out there spend hours a day, scouring the international currency markets looking for gaps and pour billions of dollars through simultaneously on both sides to make a few thousand bucks. International equity investors might simultaneously buy and sell dual listed stocks in New York and London to cash in on the difference in pricing. Now THAT's arbitrage!

Jiminimonka said...

The gold cap is now 1 million, here is a new challenge for you Gevlon!

The Gnome of Zurich said...

"This time I overstocked and so others, making waste."

If you made a lot of gold without forcing anyone to do anything they didn't want to, or producing some kind of negative externality on people not involved in your transactions (hard for me to imagine how that would happen in wow), then on balance you were almost certainly helpful rather than hurtful.

Your gold reward might be out of proportion with your social utility, but it's very difficult to make money in a true free market (which wow is a lot closer to than real life) without being on-balance more useful to others than not.

Kurt said...

@squishy:

"This speculation is not risk free, and is nowhere near 'low risk'. If it was 'low risk', Gevlon would have had a low probability of having excess stock, along with everyone else on the server who was playing the market. Otherwise, you would have to argue that anyone who buys things on sale and sells them on eBay are arbitrageurs - they're not!"

Ok, at this point we're no longer discussing WoW, we're discussing arbitrage in the real world, and disagreeing as to what it is. I can find countless examples of people referring to people buying things at yard sales and selling them on ebay as arbitrageurs with a few seconds on google. I prefer to use the term in a more historical sense, you insist in using only a more modern and limited definition. I think it is foolish to do so, you are being unduly restrictive with no gain in clarity, and in fact by being so restrictive as to define things so absolutely, you are creating an imaginary term with no relevance to the real world. There is no such thing as perfect zero-risk in the real world. As alluded to before, the attempt to construct zero-risk formulas was a major component in the last crash.

"The glyph market is like an international steel mill buying iron ore (herbs), converting it into steel (glyphs) and onselling to people who need it."

That's the normal glyph market, that is completely irrelevant to this discussion. One could have "speculated", as you would put it, on the glyph market in this instance by merely buying glyphs on monday, and selling on tuesday. Many did exactly that. Was there risk in holding glyphs overnight? Yes, as illustrated by the epic gem debacle, sometimes the patch information ahead of time is inaccurate. Was there risk in the old days, in buying goods in one city and selling in a nearby city? Yes, but I still understand that to be arbitrage.

In the end, under your theoretical definition of arbitrage, I contend that arbitrage doesn't exist, at all. Zero risk? Impossible. To conduct transactions in dollars, requires you to hold dollars. Those could lose their value. That is a risk. I'm getting tired of debating semantics here, I'll move on to a different question and call it quits on this topic.

"Buying low and selling high, being better at predicting the future will help you make profits. Thanks for the protip. You can probably get an MBA with that sort of insight!

Really though, that's plain useless. It's repeating garbage that everybody knows - if you have perfect knowledge of the future, you can make money. That's not insightful, that's bloody obvious."

"thanks for the protip"...Why are you reading this blog, if you are going to get so insulting when I attempt to say this was a useful post? It makes little sense.

Did I say it was insightful that you can make money from knowledge of the future? No. That's not what I said the insight was. The insight is that it's arbitrage, that you are removing goods from a market where it's less valued, and placing it in a market where it's more valued. This explains the utility of "short term speculation", and explains why it persists despite the negative effects that Gev detailed in his post. It's not a magical insight, but it's something that many people don't keep in mind, so it's a useful one to make. I notice you didn't talk about that, you only quibbled about semantics, as is your wont. I suppose I shouldn't have expected more from you.

unnamed said...

I observed an interesting thing on my server regarding the prices of herbs/flasks and glyphs leading up to and following the glyph boom.

Flower prices were in decline for quite a while leading up to the boom, naturally flask and potion prices deflated as I am assuming either more people were entering into the crafting activity of alchemy or the competition was trying to do something with the stocks of herbs they had.

The week leading up to the boom, glyph prices slowly rose from the absurd 90s/glyph that many were selling for to the 7-8g per mark. Still my glyph sales were in the order of 100g/day because I honestly was not trying very hard and was just selling a few stragglers left in my bags.

The night before the boom, glyph prices skyrocket, no herbs can be found and those that can be (Talandra’s rose, deadnettle and other sub-optimal herbs) are listed for anywhere from 60-800g per stack.

Flask prices remain deflated.

The boom hits and the phenomenon of the glyph harvest plays out on my server much as it has on Gevlon’s. I manage to get roughly 95k before the time cost to profit ratio and my laziness drive me to other things (like playing my class and learning new abilities etc.)

Despite the absolute disappearance of affordable herbs on the AH owing to the inscription industry, flask prices remain low.

The only explanation I have for this is that there are one or more alchemists who did the same as I did and bet primarily on flasks for 4.0.1, rather than putting those same flowers into glyphs.

Admittedly, had I diverted 80% of my herbs from flasks to inks, I could have easily doubled my harvest.

Squishalot said...

@ Kurt:

"I prefer to use the term in a more historical sense, you insist in using only a more modern and limited definition. I think it is foolish to do so, you are being unduly restrictive with no gain in clarity, and in fact by being so restrictive as to define things so absolutely, you are creating an imaginary term with no relevance to the real world."

I beg to differ. I think it's foolish to use a single catch-all term to describe everything that you appear to want to. I use two terms - speculation and arbitrage - to define risky and non-risky attempts to cash in on pricing differences. Again, what Gevlon is doing is no different to punting on the US dollar crashing.

"I contend that arbitrage doesn't exist, at all. Zero risk? Impossible. To conduct transactions in dollars, requires you to hold dollars. Those could lose their value."

That's irrelevant. The risk in question is the risk in the transaction. If you buy and sell simultaneously on two different exchanges, in the same currency, there is no currency risk. Even if the dollar loses value, the joint transaction itself has no risk (other than counterparty risk, which in the real world is represented by the stock exchange, and in WoW is represented by Blizzard).

"Why are you reading this blog, if you are going to get so insulting when I attempt to say this was a useful post? It makes little sense."

You're criticising my criticism of this blog. I'm criticising your praise of this blog. I'm certainly not using any more offensive language than Gevlon uses on a daily basis in his blogs. Why are you getting offended, other than for the potential reason that I am right, and the blog wasn't insightful / useful?

"The insight is that it's arbitrage, that you are removing goods from a market where it's less valued, and placing it in a market where it's more valued. This explains the utility of "short term speculation", and explains why it persists despite the negative effects that Gev detailed in his post. It's not a magical insight, but it's something that many people don't keep in mind, so it's a useful one to make. I notice you didn't talk about that, you only quibbled about semantics, as is your wont. I suppose I shouldn't have expected more from you."

Anyone who reads Gevlon's blog understands buying and selling across markets. They appreciate that you can take items from Horde AH to the Alliance AH and sell for profits. Is this speculation? Yes. Is this arbitrage? Not by any classical definition of the word. Just because a whole lot of morons bastardise technical concepts doesn't make their usage of it any more correct. That's a classic M&S mistake, you know.

And I find it amusing that you have such double standards. "Why are you reading this blog"? You're implying that only educated or non M&S people will read this blog. In which case, they know the 'speculation' insight that you're referring to, rendering your affirmation of how useful this insight is meaningless.

Squishalot said...

@ Kurt:

I don't think I explained myself clearly enough in my last comment, so I'm going to have another shot at it.

Glyphmas is not a new market. The Glyphmas effect is the result in a single market (the AH and the players on the realm) of an exogenous shock.

The exact real life example would be the bond market before and after a central bank meeting to decide on official interest rates. The rate announcement and associated economic data and opinions represent the new patch being implemented. Suddenly, existing bonds change in value. Some are worth more/less than they used to.

If you went into the market before the rate announcement and bought up bonds in the hope that rates would come down (value of bond increases), it's not 'arbitrage over time'. It's speculating on interest rates. It's exactly the same market, but the external market factors that influence supply and demand shift as a result of the exogenous shock.

Is the post-GFC stock exchange a new market, or is it the same market, post-shock? How about the guy who short-sells shares before when he expects the market to crash and buys them back after? Is that arbitrage?

I recall patch 3.3 coming out. Prior to it coming out, I sold off all my Frozen Orbs at insanely inflated prices because of the uncertainty about what the new market price would be post-patch once you could trade them for Eternals. I then bought them all back at a discount to my purchase price. Would you call that arbitrage? I wouldn't. Noone knew what the price would be post-patch. All you could do is punt (read: gamble) on what it would be. Arbitrage isn't about gambling. It's about making secure, locked-in profits.

What I would call arbitrage is seeing the market price of Eternal Lifes for 25g, and the market price of Frozen Orbs at 20g. I need an Eternal Life, but instead of buying it on the AH, I choose to buy the Frozen Orb and exchange it for an Eternal Life. This transaction nets me an Eternal Life for 20g, which gives me a net return of 5g, risk free (barring exchange problems, i.e. WoW servers crashing and losing the Frozen Orb in the mail somehow).

Or even just buying anything on the AH for under vendor price. This is arbitrage.