Arbitrage is a term used to describe the practice of using price variances between different markets in order to make a profit. This may mean different geographic markets such as countries, regions, states, or even cities and towns. The term can also cover selling in different time periods if you are buying in today’s market and holding to sell in a future market.
In the modern financial world using arbitrage is a common tool and it is what helps keep most international markets and prices stable. Currency exchanges and commodity prices all incorporate people using arbitrage methods to stabilise and set final prices. Even a small difference in prices or interest rates (interest rates are a form of price – the price of money) between two markets will be exploited by traders. As the commodity, stock, or currency is bought in the cheaper market and sold in the higher priced market, the cheaper market price begins to rise on that demand and the selling markets price falls to compensate for the extra supply, bringing prices into equilibrium. With something like currency this is almost instant, with computerised algorithms and automated buying and selling process taking advantage of miniscule differences and evening them out in microseconds, but it still makes profits.
With Lego many different markets exist and are ripe for arbitrage opportunities. A simple example that many of us investors do already without even referring to it as arbitrage is buying a set in a department store at a great discount and selling it straight away for a profit on Ebay or another selling market – arbitrage in action.
Now that Brickpicker has opened up the data that is collected for each lego set to include international Ebay sites in the UK, Germany, and Australia in addition to the original US information, we now have the ability to possibly identify arbitrage opportunities between these different markets. That is something I’d like to examine in this blog article. Can we analyse some of those differences and find opportunities to buy in one market and sell immediately in another? I think we can.
Opportunities exist between all 4 of the markets we have data available, but I’m going to focus on providing examples from just two – The US to UK pairing. Data has only been available for the non US sales for two months and it can be a little patchy for some sets so looking at Aus data is a little less reliable whereas the Euro (german) data has decent sales volume it would seem but we don’t have as many Brickpicker members from Germany. The UK seems to have the best possibility for discussion. I’m also only going to provide a few examples of arbitraging opportunities, I’m not going to list a whole swag of them or research them in depth for you. If you want to act on this information then I’d encourage you to do your own research first and to seek out other opportunities.
US to UK – Top 5 Price Variances
The table above shows the top 5 sets I could find in terms of percentage difference between the US buying price and the selling price in the UK once you convert the pound to the US$ at the current exchange rate.
I think you’ll be impressed and a little surprised by the potential profit margins those percentage differences represent! Now the obvious caution here is that some of the sets have low volumes in one or both markets, making their current market prices a little less reliable. That is why you must do your own homework when looking at these potential opportunities. But what it does show is that there are some possibilities that warrant a serious investigation.
A UK based seller can use these opportunities to import buy from US Ebay and sell locally on UK Ebay. There is also the opportunity for US based sellers to potentially sell on UK Ebay for better returns (I think this is possible to set up, but not 100% sure on the workings of Ebay account rules etc).
UK to US (the other way) – Top 5 Price Variances
How about looking at arbitrage in the other direction? High US prices and low UK ones? A US based seller can use these opportunities to import buy from UK Ebay and sell locally on US Ebay. There is also the opportunity for UK based sellers to potentially sell on US Ebay for better returns than on their local market. Lets look at the top 5 sets:
Now that’s some even more impressive possible gross profit percentages! Again the caveat is low volumes on most of those sets playing with the volatile market prices. But is that the case for all of them? How about every other set?
Well what I can also share with you is that on the US to UK price variance (the first table) I found at least 60 sets that had a percentage variance of 50% or higher. Sixty! Now within that there is sure to be opportunities. Hint: 8099, 10231, 4183, just a few to whet your appetite. Going back the other way I found 60 sets with over a 100% price variation! Plus another 100 that were between 50% and 100%. There is sure to be some gems amongst them. Hint: 8190, 7997, 10178.
Shipping and Fees
The straight price differences you see between sets and the ones I’ve presented here represent the gross profit potentially available. What they don’t account for is something I’m sure many of you will have been thinking about in your head since reading the opening title of this blog. Selling fees and more importantly shipping costs!
Firstly, selling fees are generally 10-12% of the sale price on Ebay from the Ebay fees and Paypal transaction fees. These fees need to be considered if you are buying in one market and intending to sell in another. However they don’t need to be a factor in the decision to sell in a different market if you already own the set. If you already own it and intend on selling it in your local Ebay marketplace then you will already be factoring in the fees to your pricing and decision to sell. Deciding to sell in the US or UK incurs no additional fee (that I can see – but I’m not an expert on Ebay fee structures).
There may also be some small currency conversion fees charged by your bank or financial institution. I get charged 1.25% by my bank. You can account for that by adding it in to the currency conversion calculator rather than taking the exact listed rate. Shipping costs. Now this is the major hurdle to overcome. It is where your own research must come to the fore in determining a worthwhile inter-country arbitrage opportunity.
Shipping costs will be the killer of many good looking deals. Finding the cheapest (whilst still reliable) method of shipping is a must. Polybags and smaller sets will obviously be the best potential sets here as the shipping costs should be minimised.
Arbitrage opportunities exist right now. They just need to be ferreted out and seized upon. I’m sure there are many traders doing this right now and perhaps even some of you Brickpicker members. The excellent new data we have available on this website has made finding opportunities easier and I‘d encourage those of you with the time available to hunt down the profitable trading ones after accounting for fees and shipping. Over time the data will get more reliable and I’ll be interested to see if some of the margins between markets begin to narrow as people look to shift sets from cheap regions to expensive ones.