There is a strong similarity between the microstructure of high-frequency arbitrage and the vast network of global, national, and local dry and wet freight. ICE and NOS exchanges offer physical and financially settled freight derivatives to manage freight risk when operating on a global physical scale. These forwards provide a basis for pricing physical spreads between terminals and ports.
Cross market arbitrage uses currency as a general medium of price discovery. Physical commodity arbitrage uses the freight market in a similar fashion.
To illustrate the point further: A Year of Global Shipping Routes Mapped by GPS.
Each system contains popular or frequently traversed nodes offering price discovery - consider the relationship of CME's GC contract as the global benchmark for gold and the pricing of related ETFs relying on that fundamental relationship. Each system contains bottlenecks and capacity restrictions, from pipeline radius to canal width to latency limitations.
Strogatz and Watts (1998) and Watts (2002) (pdf) offer insight into network complexity, how and why certain nodes become popular, and responses in the event of network constraints or cascades. Knorring (2003) (pdf) provides insight into route choices based on distance traveled and perceived congestion between two comparable routes. Morse and He (2010) (pdf) and Kumagai, Arai and Iwata (2001) (pdf) provide context for pricing physical arbitrage via forward markets and import/export flows.
In the end, there is something to be learned from every network containing profit-seeking entities.
Cross market arbitrage uses currency as a general medium of price discovery. Physical commodity arbitrage uses the freight market in a similar fashion.
To illustrate the point further: A Year of Global Shipping Routes Mapped by GPS.
Each system contains popular or frequently traversed nodes offering price discovery - consider the relationship of CME's GC contract as the global benchmark for gold and the pricing of related ETFs relying on that fundamental relationship. Each system contains bottlenecks and capacity restrictions, from pipeline radius to canal width to latency limitations.
Strogatz and Watts (1998) and Watts (2002) (pdf) offer insight into network complexity, how and why certain nodes become popular, and responses in the event of network constraints or cascades. Knorring (2003) (pdf) provides insight into route choices based on distance traveled and perceived congestion between two comparable routes. Morse and He (2010) (pdf) and Kumagai, Arai and Iwata (2001) (pdf) provide context for pricing physical arbitrage via forward markets and import/export flows.
In the end, there is something to be learned from every network containing profit-seeking entities.
