Allotment

A term used in connection with the amounts assigned to members or subscribers in underwriting syndicates. For example, it is generally understood when an underwriting syndicate is being formed and different concerns are subscribing for portions of the underwriting, that the managers of the syndicate have it in their power to allot to a given subscriber less than the amount applied for, provided the total subscription or underwriting exceeds the total amount offered for subscription. There have been many instances where an over-subscription of a stock or bond issue has been so great that the subscriber is finally allotted only a small proportion, sometimes only 10% of the amount for which he has subscribed. This fact of a tendency for over subscription has often, in the case of popular securities, had the result of inducing underwriters to sometimes subscribe for even greater amounts than they expected to get. In this way, they have been able to secure the amounts which they actually desired.

The meaning of this expression is the buying and selling of the same thing in two different markets, as, for instance, New York and London, the purpose being to make a profit from the difference in the quotations between the two markets. The term is used chiefly in reference to dealings in stocks and bonds, but is also used in dealings in exchange and in other commodities.

Arbitrage in stocks is based on the temporary differences in prices between the different markets for the same stock. For instance, when a stock is selling at a higher price in one market than in another, it is sold in the market where the higher price prevails and is bought in the market where the lower price prevails. The operator speculates on a return to the same price in both markets. When the equality in price has been restored he closes his transaction by buying where he sold and selling where he bought. The difference in price that existed, of course, represents his profit, unless the transaction has not been a successful one, in which case a loss may be reported.

To illustrate the method of arbitrage trading we will assume that a stock is selling in one market at 100 and in another at 98. It is then sold in the first market at 100 and bought on contract in the second market at 98. If the stock advances to 100 in the second market while it remains stationary in the first market a sale is then made in the second market and thus 2% is made on the transaction there. The same amount of stock is then bought back in the first market at 100, and hence neither profit nor loss, barring commissions, results in the transaction in the first market, the profit in the second market representing the entire net profit of the double transaction. Should the stock decline to 99 in the first market and advance to 99 in the second market the transaction can be closed up with a profit of 1% in each market or 2% in the two markets.

Because of the system of calculating values for American stocks on the London Stock Exchange, prices on the London Exchange are 2 5/8% higher than the prices for the same stocks on the New York Stock Exchange when they are actually the equivalent of the prices on the New York Exchange. Hence, in arbitrage dealings, allowance has to be made for this difference in prices between London and New York, which is merely apparent and not actual. The figure of 2 5/8% mentioned above is arrived at in the following manner: In dealings in American stocks on the London Stock Exchange four shillings is counted as one dollar. Four shillings being equal to 97 1-3 cents, the price of an American stock must be 2 2-3% (quotably 2 5/8%) higher in London than in New York if the London price is to be equivalent to (or at a parity with) the New York price. Not 2 5/8% of the par value is to be added arbitrarily to the New York price, but 2 5/8% of the New York price, whatever it may be, is to be added to the New York price to make an equivalent London price. Thus, for a stock selling at 50 in New York the equivalent price in London would be quotably 51 3/8%. For a stock selling at 100 in New York the equivalent price in London would be 102 5/8%. Conversely, for a stock selling at 100 in London the equivalent price in New York would be 97 3/8%, and for a stock selling at 50 in London the equivalent price in New York would be 48 5/8%.

The difference in equivalent prices between New York and London permits two kinds of operations in stocks that are dealt in in both markets. One operation is called a "spread" and the other is called a "back spread." See also definition of "spread" as used locally under its own heading.

In the "spread" as employed in arbitrage dealings there must be more than a normal difference in prices between London and New York. The stock is sold in London where the higher price prevails, and bought in New York where a lower price prevails. Then, when the equality in price is restored the transaction is closed by buying in London and selling in New York. The difference in excess of the normal difference represents the profit in the transaction.

In the "back spread" there must be less than the normal difference in prices between New York and London. The stock is therefore bought in London where the nominal higher price prevails, and is sold in New York where the nominal lower price prevails. The transaction is finally closed when the equality in price has been restored by selling in London and buying in New York. The difference in price that existed less than the normal difference, represents the profit in the transaction.

A large arbitrage business in active stocks is carried on between London and New York by cable daily. By the clock London is five hours ahead of New York. At 10 a. m. in New York, when the New York Stock Exchange opens, it is 3 p. m. in London. The London Exchange opens at 11 a. m. and closes at 4 p. m., except on the last day of accounting, when it closes at 4.30 p. m. After the closing of the London Exchange, American stocks are still traded in in the Street. A good part of this street market represents arbitrage business with New York. Very little business is transacted in New York before the opening of the New York Exchange, but orders are sent to London for execution. The London curb brokers remain active as long as there is business to keep them, continuing usually as late as 5.30 or 6 o'clock.

There is also a business in arbitrages carried on in grain, cotton, coffee and so forth, between different markets in one country or between different countries, just the same as in stocks between New York and London.