### usps insurance rates

What do USPS insurance rates tell us about its operations? Here is a 2007 document regarding insurance rates for domestic mail:

Prices for insurance coverage changed as follows:
Value up to $50 is$1.65.
$50.01 to$100 is $2.05.$100.01 to $200 is$2.45.
$200.01 to$300 is $4.60. The price per additional$100 of insurance, valued over $300 up to$5,000, is $4.60 plus$0.90 per each $100 or fraction thereof. Crudely taking the mid-point of each bracket up to$300, we get implied loss rates of 6.6%, 2.73%, 1.63%, 1.84%, respectively. The rate converges asymptotically to $0.90/$100, or 0.9% implied loss. The numbers have such a wide range that it’s worth taking a closer look.

### latency arbitrage

Michael Lewis has been in the news for his new book, Flash Boys, decrying the problems brought about by a system ill equipped to deal with high frequency trading. The core problem can be stylistically summarized by this picture:

I place an order from the location of the red square to the green and purple exchanges on which trades occur. My communication capability on the gray “public” channel is slower than the communication capability of some competing agent on the blue “private” channel. Therefore, triangle inequality notwithstanding, the competing agent observes my actions at the green exchange and reacts at the purple exchange before my order arrives there. It appears to me exactly like I have been scooped by somebody acting anti-causally, so what happened?
I am surprised that this happens. The distribution of closing prices should be sharply cut off at the lower end, because any good selling at substantially below the mean is subject to arbitrage on the price distribution. This works best for abstract goods like gift certificates, where there is no shipping cost to complicate matters. For example, a gift certificate sells for $100 on average, so you bid on all auctions for it at$95. If there is enough price fluctuation, you will get a few at that price. Now you relist them. There are more sophisticated options but let’s say you just relist them as auctions. Then on average, you will get $100. So you make$5 for each one sold.
If everybody thinks this can be done, they will all go do this and there will be no auctions that close below $95. This shows closing prices of equally valued amazon gift certificates sold on ebay within the last two days. There are a lot of “buy it now” transactions listed, and those tend to be at the higher end. It seems like an excellent arbitrage opportunity right here to bid on auctions selling at below$80 and relist as “buy it now” for, say, $88. Ebay and paypal fees will eat about$6, so there is still a profit of at least \$2 each time this happens.