DEFINITION of Garbatrage
Garbatrage refers to an increase in price and trading volume across a particular sector of the market or economy that occurs as a result of a shift in sentiment towards that sector based on news of a recent takeover. Garbatrage is a take on the concept of arbitrage, which is when an asset is priced differently in different markets, allowing the trader to financially benefit from a simultaneous purchase and sale of the asset in the different markets. Garbatrage allows a trader to potentially make money based on a momentum play on the back of shifting sentiment as opposed to a price change due to shifting underlying fundamentals.
Garbatrage is also known as "rumortrage."
BREAKING DOWN Garbatrage
Garbatrage is usually used to refer to firms that are not directly related to the takeover. Speculators feel that the initial takeover is a precursor to more takeovers within the sector. Proponents of behavioral finance theory would view this psychological impact as evidence that supports their theory.
Example of Garbatrage
In August of 2017, Amazon announced that it would be purchasing Whole Foods. This announcement sent shock waves through grocery stocks and caused volatility and price depression. Although the underlying fundamentals of these grocery providers hadn't changed, the Whole Foods acquisition provided rampant speculation across the industry as to who might be next to be acquired and what the acquisition of Whole Foods by a tech company meant for the future of the grocery industry as a whole. The price of grocery stocks took weeks to recover.