Work Service in London. Is this an opportunity for arbitrage?

Trading on price differences for the same asset on two exchanges is profitable only in a few situations.

On Thursday, February 18, shares of Work Service, a personal services company, are set to debut on the London Stock Exchange. Its securities will continue to be listed on the Warsaw Stock Exchange, making it a dual listing.

— "This is another step for us in building Work Service's position in international markets. Through this operation, we will increase brand recognition and gain access to a broad group of global investors. We are convinced that our presence on the London Stock Exchange will help us strengthen our regional leadership in the industry and ultimately enter the top five HR service companies in Europe," says Maciej Witucki, CEO of Work Service.

The valuation in London will be in pounds and in Warsaw in zlotys, but the company ensures that the assets will have the same price on both trading floors. Adam Jenkins, President of Work Service International, claims this is possible through the use of a single ISIN code (securities depositories use it to identify settled shares). This way of thinking is not understood by representatives of investment funds or the National Depository for Securities (KDPW).

— "There is no procedure that automatically aligns price anomalies," emphasizes Łukasz Hejak, a manager at Investors TFI. — "If the shares are listed on the London Stock Exchange, that exchange will determine the rate and pass it on for transaction settlement in the local depository, and we will handle any potential transfer of papers through a so-called link," says Dariusz Marszałek from KDPW.

Theoretically, therefore, it will be possible to perform arbitrage on Work Service shares—operations that exploit different prices on both exchanges.

It doesn't work in Poland...

For individual investors, international arbitrage is complete fiction. This is due, in part, to limitations in access to foreign exchanges through Polish brokerage houses. Most simply do not offer such a service. Even if it is available, commissions in practice exclude the profitability of arbitrage operations.

Institutional investors face essentially the same problem. For arbitrage to make sense, there must be a high level of liquidity in both listing markets. In the case of Work Service, the spread between buy and sell prices in the Warsaw order book can reach 3-4%, which indicates a lack of liquidity. This is confirmed by turnover; yesterday it amounted to about 10,000 PLN.

— "I haven't encountered a situation where someone simultaneously bought and sold shares on two exchanges to exploit price differences. But I have encountered arbitrage understood as a choice of location for executing a transaction," says Rafał Janczyk, fund manager at Aviva Investors.

Among companies also listed on the Warsaw Stock Exchange, the subjects of such operations were reportedly the shares of Czech CEZ and NWR or Austrian Immofinanz. In his opinion, this once resulted from the fact that Polish TFIs did not invest directly in foreign markets, and in later times from the fact that with large volumes, a transaction carried out even one way gave a noticeable profit. However, it can only be achieved with transactions amounting to millions of zlotys. Even in this form of arbitrage, the problem of the liquidity of the securities involved returns.

...but sometimes you can make money

High liquidity should theoretically lead to the unification of rates on the exchanges involved in a dual listing. And essentially, that is the case. However, there is one more factor that drives arbitrage transactions.

— "Assuming an efficient market, the rate of the same security on different exchanges should be the same. But price discrepancies do occur, especially when the company is listed on markets with very different trading hours, e.g., the United States and Japan. But there are other reasons too. Just a year ago, discrepancies in the rates of Russian companies listed in Moscow and London reached over a dozen percent. In London, it wasn't shares being traded, but GDRs, often issued at a 1:1 ratio, thus similar to shares. With these listing discrepancies, factors related to country risk came into play. Some investors simply could not invest in Russia. But the whole situation created an ideal field for arbitrage," says Łukasz Hejak.

— "Globally, arbitrage is an interesting topic. In the Polish context—it isn't," concludes Rafał Janczyk.

36 – This is the number of companies listed on the WSE that are simultaneously listed on other exchanges. On Thursday, Work Service will join this group.