This article discusses the history of arbitrage from ancient times until the beginning of the twentieth century. Opportunities for arbitrage trading in ancient times are related to the movement of goods over distance. The key role of the bill of exchange in arbitrage trading during the Middle Ages is identified and the connection to ‘arbitration of exchange’ discussed. A 17th century arbitrage involving the gold and bill of exchange markets is detailed. As reflected in merchant manuals of that period, the connection between riskless arbitrage trading and the method of conducting arbitration of exchange in the 18th and 19th centuries is detailed. An overview of 19th century arbitrage trading in securities and commodities is also provided. The article concludes with an examination of the etymology and historical usage of the word ‘arbitrage’ and the associated ‘arbitration of exchange’.
...Arbitrage in Ancient Times
Records about business practices in antiquity are scarce and incomplete. Available evidence is primarily from the Middle East and suggests that mercantile trade in ancient markets was extensive and provided a number of avenues for risky arbitrage. Potential opportunities were tempered by: the lack of liquidity in markets; the difficulties of obtaining information and moving goods over distances; and, inherent political and economic risks. Trading institutions and available securities were relatively simple. Circa 1760 BC, the Code of Hammurabi dealt extensively with matters of trade and finance. Sumerian cuneiform tablets from that era indicate a rudimentary form of bill of exchange transaction was in use where a payment (disbursement) would be made in one location in the local unit of account, e.g., barley, in exchange for disbursement (payment) at a later date in another location of an agreed upon amount of that local currency, e.g., lead . The date was typically determined by the accepted transport time between the locations. Two weeks to a month was a commonly observed time between the payment and repayment. The specific payment location was often a temple....MUCH MORE (24 page PDF)