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Technology Stocks : Creative Computers(MALL) -- Ignore unavailable to you. Want to Upgrade?

To: John Martin who wrote (1269)	12/22/1998 10:48:00 AM
From: Clarksterh	Read Replies (1) \| Respond to of 1634

John - Haven't you always wondered why it is that the S&P futures move so perfectly in tandem? Or why puts and calls with the same strike price move in tandem? The answer is arbitrage - situations where knowledgable traders can lock in a guaranteed profit with no risk, and the very act of arbitrage lessens the disconnect between the two items. In the case of MALL and UBID this would be done by shorting 73 UBID (and hence driving the price down) and going long 100 MALL (and hence driving the price up). If this happens enough the price gap disappears, but if there aren't enough UBID shares to short then there won't be enough arb to close the gap. (and no they won't just buy 1/2 the deal (100 MALL) - arbitragers like a guaranteed profit.) Anything that prevents an arb from either opening or closing an arb position will allow the gap to stay open. Not only does a lack of shortable UBID fall into this category, but so does the possibility that MALL will not spin off UBID. The arb doesn't want to hold the position indefinitely. They are not investors. They want to exactly cancel the long and short positions at some point in the future. Clark BTW - I agree with you that MALL is underpriced relative to UBID, but, for instance, lets assume that Creative discovers that the distribution would not be non-taxable, so they decide not to spin off UBID. At that point the incentive for not splitting disappears - what are they going to do now? Never split again?