Tokenized Stock Arbitrage Report | October 2021

Welcome to the October 2021 edition of STM’s Arbitrage Report! There’s a lot to cover, so let’s hop right into it.

FTX sees record-high trading volumes

It’s been an electric month for tokenized stock trading. FTX saw over $94,000,000 in monthly volume traded on their exchange across 27 different tokenized stocks this month. That’s a 571% spike in volume from September’s $16,000,000!

And to make things even more interesting, we saw some stocks trading at up to a 10% discount on FTX last month compared to the official NASDAQ price. That means if a stock XYZ was trading at $100 on NASDAQ, you could theoretically buy it on FTX for around $90.

But this month? That 10% figure shrank drastically. We saw the two exchanges — both FTX and NASDAQ — have their prices converge closer together. However, there’s still hope for the arbitrageurs out there: All 27 tokenized stocks still had price mismatches every single day from their NASDAQ prices.

So, what does this all have to do with arbitrage opportunities?

This is fantastic news for everyone, because it shows that tokenized stocks are approaching what’s called a semi-efficient market. With the 571% volume increase on the FTX exchange this past month, we’ve seen hoards of traders and hedge funds capitalize on the price differences to the NASDAQ. This increased trading and market efficiency via FTX gives us a nice sweet spot. It’s a comfortable balance between (1) a more robust price discovery and (2) still having loads of hourly and daily arbitrage opportunities.

Case Study: Arbitraging $TSLA after-hours

News and catalysts don’t wait for the opening bell.

When Elon Musk created a poll for his more than 63 million Twitter followers last week, he gave them the chance to voice their opinion as to the fate of over $20 billion of his Tesla stock, investors went into a frenzy. How will the market react? Is $TSLA done? Am I going to lose all of my money?

These questions would not be answered until 9:30 a.m Monday morning — a full 48 hours later.

…Or would they?

Due to the nature of tokenized stocks, traders and arbitrageurs were able to track the performance of $TSLA in real-time, even having the chance to buy or sell stock far in advance of the open on Monday morning. With tokenized stocks, traders can buy and sell 24/7 without having to time the market. They’re the first ones to the finish line — even Wall Street hedge funds get beat out by the crypto trader here.

Gone are the days of sleepless nights wondering if your hard-earned money will be okay come the market open — thanks to tokenized stocks. Even more, last month provided a rather profitable return for many investors in the space. Let’s take a look at the biggest gainers and decliners.

Winners & Losers

As it is quite apparent, the overwhelming majority of tokenized stocks closed out the month in an upwards trend, proving handsome profit potential for those who own stock. With 78% of the companies trading on FTX finishing either flat or positive, simply buying and holding would likely provide an increase in value. There are opportunities to profit even more than that through arbitrage. Let’s explore this further with three of the biggest gainers first.

Winners

October was a massive winning month for the tokenized stocks of $COIN, $GBTC, and $TSLA. Closing the month out on the near highs for Coinbase and Tesla, investors could have purchased stock at any point and finished profitably. $GBTC closed out on Halloween with a bull flag beginning to form. We can see from the chart that the NASDAQ equities performed exceptionally well too. If we dig in the three graphs, there is something similar with all three — copious instances of price discrepancies between the tokenized stock and equity. What does this mean? One word — arbitrage. We have repeatedly seen that the tokenized stock and equity revert to near-identical prices in the long run, so any price difference is a potential opportunity. If you bought $TSLA on FTX on October 17 when it was trading below the NASDAQ pricing and held through the end of the month, you would be up over 11% — that’s right, 11%! Arbitrage is found everywhere, and it doesn’t have only to be stocks that trend upwards to capitalize on potential arbitrage — you can make money in both directions through various trading techniques.

Tesla was the outright winner, gaining close to 60% and catapulting Elon Musk to the world’s richest man. Coinbase and Grayscale Bitcoin Trust benefited from many cryptocurrencies reaching all-time highs, as they finished up over 40% and 25%, respectively. What do the three top gainers have in common? They all have massive crypto exposure. We will see how this shakes out in the months to come, but it is an exciting trend nonetheless.

Losers

Social media took quite the hit to close the month out. Twitter and Facebook were the big losers. Mark Zuckerberg, the founder of Facebook, recently announced the name change and direction he is taking his company, as it will now emphasize developing for the Metaverse. Time will tell how Meta will trade in November and how tokenized stock traders will respond to the news.

As the charts display, $PYPL, $TWTR, and $UBER all trended downwards throughout October. With the three finishing more than 5% off the beginning of month prices, many investors may think that trading these names would have been a losing proposition. To that, I encourage them to notice the gaps between traditional equity and tokenized stocks. On October 11, investors could have gone long the FTX $PYPL and caught a several percent move before it caught up to the traditional equity. Performing this process over and over is how large profits are made. Sam Bankman-Fried of Alameda Capital and FTX used this exact tactic to make billions of dollars en route to becoming the richest person under 30 years old.

Time has already told us the opportunities to profit in these markets are ubiquitous. You can be sure that we’ll be on top of all things tokenized stocks, and we cannot wait to see you all in November for our following tokenized stock report! Until then, good luck in all of your trading endeavors!

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Everything in this report is for informational purposes. Nothing in this report should be taken as financial advice or as an inducement to purchase or sell any security. Nothing in this market report should be used as legal advice. Always do your own research before making any decisions regarding financial transactions of securities.