Agents of One Price
The Barclays Premier League championship game is to be played in the next two days. Tickets have been distributed to ticket agencies so the football-stricken fans can get them before the big day. As preparations have been made on the field in the stadium, three distinct agents separately plan for a big attack: Bobby, William and Charles.
Bobby was a genuine football fan and so bought one ticket at the nearest ticket outlet. William was given complimentary tickets for free and Charles bought one. Both William and Charles had other plans for the tickets that they have other than watching the game.
Charles decides to sell his on the big day when all tickets have been sold so he can put an increase on the original price and still someone will buy the ticket. In doing so one is called a speculator.
William on the other hand sells the ticket at the usual price sold at ticket outlets. He sells them secretly to certain people. Since he got them for free, the whole ticket price became his whooping profit. For that William becomes an arbitrageur.
Bobby, Charles and William are examples the three different agents at work in any market: traders, arbitrageurs and speculators respectively. The traders are those that determine demand and supply; the arbitrageurs exploit price variations and speculators hold on to tickets in hope of making a sale later.
In a pure arbitrage transaction, there are no trading risks in the normal sense and an arbitrageur takes the opportunity of a near-riskless profit. The absence of risk is a distinguishing feature of arbitrage.
Speculation is inherently risky trading for the expected price rise may not come true. The speculator buys tickets holds on to it until the right time comes. If he miscalculates and there are still extra tickets to the game on the big day, he loses his advantage. If he sells one ticket at his planned price because of high demand, and with the extra ticket he may watch the game. If excess tickets are on sale on the day of the game, he would be lucky to sell one ticket at the same price he bought it. The sad part would be when no one decides to buy the extra ticket Charles has.
In the real world, it is often impossible to distinguish these classes of transactors. In such examples is there no way of tell from the ticket window a tout from a true football fan. It is also hard to separate arbitrageur-tout from a speculator tout.
The traders maintain the equilibrium of demand and supply such as game organizers and the fans. The arbitrageur and speculators are the ones that disrupt the equilibrium.