Another Brick in the Wall

Supreme, the iconic skateboarding and lifestyle brand, was founded by fashion designer James Jebbia. It gained prominence at a time when the eccentricity and flamboyant flair of skate culture defined fashion’s edge.

Today, Supreme is a billion-dollar brand—instantly recognizable by its signature red box logo (or “Bogo” as affectionately known by its fans).

The brand operates just four stores across the U.S., with two on each coast, and drops collections twice a year—Spring/Summer and Fall/Winter. But instead of releasing everything at once, Supreme employs a drip-release strategy, unveiling one new drop per week. This method not only sustains interest throughout the season but also fuels perpetual anticipation for what’s next. In short, it masterfully capitalizes on FOMO—the Fear of Missing Out.

Supreme doesn’t limit itself to clothing and skate gear; it has expanded into an ever-widening pool of accessories. From bicycles and foosball tables to baseball bats and even crowbars (yes, crowbars)—any item bearing the Supreme logo becomes an instant sell-out.

In the fall of 2016, Supreme released a brick stamped with its logo. Priced at just $30, it sold out in seconds.

At that very moment, we witnessed the rise of an arbitrage opportunity—a smart and swift way to profit by buying low and selling high.

Soon, the Supreme brick was trading on resale platforms for several hundred dollars. At its peak, one sold for a staggering $1,000 on eBay.

In my previous article, I mentioned I’d continue discussing High-Frequency Trading (HFT) strategies. This week, I delve into Statistical Arbitrage.

Arbitrage strategies demand near-instant execution. Computers can scan markets for fleeting opportunities, making arbitrage one of the key strategies utilized by HFT firms.

These firms leverage cutting-edge technology to exploit minor, short-lived discrepancies between related securities.

Of course, arbitrage isn’t exclusive to HFT. It's a long-standing and widely used strategy by all market participants. However, HFT firms gain an edge through speed—accessing and interpreting market data faster than others. This ultra-fast strategy is often referred to as latency arbitrage.

HFTs simultaneously open long and short positions in correlated securities to exploit small deviations from parity—aiming for almost risk-free profits by acting faster than anyone else.

Two Main Types of Statistical Arbitrage

1. Market-Neutral Arbitrage:
This strategy involves taking a long position in a relatively undervalued instrument while shorting a correlated overvalued counterpart. Because the instruments are highly correlated, gains and losses due to broader market movements tend to cancel out. Profits are derived from the reversion of price discrepancies between the two securities.

2. Cross-Asset, Cross-Market, and ETF Arbitrage:
Here, the same or equivalent asset is bought in one market at a lower price and sold in another at a higher price. These pricing inefficiencies last only milliseconds in modern markets—providing a lucrative opportunity for HFTs who can act faster than the market can adjust.

And arbitrage opportunities aren’t limited to capital markets. HFTs actively exploit triangular arbitrage in the foreign exchange (FX) markets, profiting from asynchronous price movements between currency pairs—be it due to temporary mispricings or persistent structural inefficiencies.

As I noted earlier, arbitrage appears in the most unexpected corners of today’s niche consumer and collectibles markets.

When Supreme released its brick, it sparked curiosity: “What if you built an entire house out of Supreme bricks?”

Given that a modest house requires around 117,600 bricks, and factoring in logistics and other costs pushing the per-brick price to $40, the total cost would come to $4.7 million.

Yet ultimately, what’s being purchased isn’t just a brick—it’s another brick in the wall of cultural capital.