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In part 1, I provided historical context. I explained what Runescape was and why Runescape was so great in the mid-aughts. I also provided details pertaining to the machinations of the in-game economy and the player-to-player trading system.
In this post, I will apply my knowledge of trading to the hypothetical markets that existed in a game that was in its most pure form twelve years ago. Why? I enjoy writing about games. Also, tens of thousands of people experienced the system in its prime, but I’ve yet to encounter a perspective that is anything more than a recitation of history. Simply, I am happy to contribute to the preservation of the game, especially in a more formalized way.
The last bit of context (I swear): Trading in-game gold pieces (gp) for real-world dollars has always been prohibited, but during the “golden days” of Runescape, it was relatively easy to get away with. I haven’t found a historical guideline, but in 2007, 1,000,000 gp was worth roughly $4 USD. Today, 1,000,000 gp is worth roughly $.50. Also, there were no “official” in-game prices of items. Experienced players generally knew the prices of popular items, but there was a decent amount of leeway and a surprising amount of trades in which experienced players traded items in addition to gold for other items, muddying the equation.
It’s important to note that it wasn’t possible to go short in Runescape. If you were a market maker, you held stock in what you were selling. So, when it was time to log off for the night, would prominent market makers sell their stockpile of goods? In contrast to the real-world notion of a market maker, in Runescape these guys would generally just hold stock “overnight.” The spreads were generally quite wide and the merchants who might have been debating this question at the time probably held some sway over the market as a whole. Also, the quantity of nearly every single item that existed in the game was constantly rising.
Legal “Merchanting” Strategies
If you’ve ever seen a movie that features trading, you’ve probably noticed the physicality of floor traders. For a long time, financial firms preferred to employ former college athletes due to their size and intensity. In an environment where getting noticed means getting more order flow, there is an incentive to bulk up or even change the pitch of one’s voice.
In Runescape, there are a few ways to increase your presence, even if you are making the same market as someone standing in close proximity to you. This is the only “strategy” is not a method of merchanting in and of itself.
Increase your combat level
The only stat that is always displayed to other players is your combat level. These levels range from 3-126. Having a higher level usually means getting more respect and more trades. Let me provide an example.
I tried making markets on a highly-profitable enchanted necklace (the Amulet of Glory) with my buddy Vivek. Technically, we were trading a more complex strategy that I would term the “Charge Spread.” The Amulet of Glory was a necklace that could be further enchanted if you completed a certain quest and then ran deep into a dungeon to charge up. The “Uncharged Glory” was always cheaper than the Charged Glory, so simply buying them, charging them, and selling them, was a bonafide money-making method. However, in combining several of the strategies to be defined below, we could arbitrate between player killers unloading the uncharged amulets cheaply, the labor/time cost to charge the amulets, amulet chargers’ prices, and the prices paid by merchants buying the charged amulets. This strategy could be scaled from quite simple to very complex.
In executing one of the more simple variants, my buddy Vivek told me to follow his lead. Whenever we tried it, he got all the trades and I got none. Despite the fact that we were making the same market. He was nearly maximum combat level (117) and I was barely 85. His avatar also had more impressive gear. Yes, it made a difference! Back in the day, players really respected those with higher combat levels, as it also conferred a baseline of trustworthiness.
Equip better gear
Along with having higher combat levels, players who adorned their avatars with more expensive gear were more likely to be sought out in crowds. However, as much as players admired the rich, there could sometimes be an amount of contempt and suspicion. When trading with someone who displays vast wealth and seems to be trading systematically (e.g. not for a personal need), one must stop to think about who is getting the short end of the stick.
Another reason why players would gravitate toward wealthier, more experienced merchants is that they would likely have more plentiful stock. Plenty were surely burned at least once by wasting precious time trading with level 50s who were dealing on too small a scale to be worthwhile.
Get noticed in chat
Runescape was notorious for the effects that you could apply to text. Many experienced merchants used auto-typers which, although botting was disallowed, remained in a grey area of the rulebook, as they really didn’t harm anyone. The result was a total flood of messages from all sides. The only way to truly differentiate your text from others was to be elected a Player Moderator. Moderators had a cool crown next to their names in the chatbox, and, even if a player had messages filtered to ‘friends’ in order to cut down on the spam, the player moderator text would always be shown. While being named a player moderator was nearly impossible, I have evidence that many of these players used their influence to spur successful merchanting careers.
Tightening Bid/Ask Spreads
Forget decimalization, high-volume items in Runescape traded at pretty wide margins. For example, a raw lobster might have been bought at 280 gp and sold for 290 gp (a 10 gp spread was common for raw materials). For anyone in finance, it might seem intuitive to just start buying at 281 and selling at 289. But, this didn’t happen. While spreads might have tightened, there is no surviving evidence that this was ever heralded as a reliable way to make money. Why?
First of all, the markets in Runescape weren’t as efficient as a modern exchange. Information was digested slowly and nobody had a complete picture of what was really going on. Data on total volume didn’t exist and demand was hard to gauge, even in the market centers. The spread cushion provided a healthy profit and a strong protection against the unknown. Further, the participants were immature. Round numbers were popular and anyone trying to knock a few gp off the spread would have been viewed with suspicion. This being said, tightening the spread was a viable, though risky, strategy.
Some type of traders arbitrate between what’s going on in trading pits and what information they can see displayed on their own computers, or, “screens” from market data feeds. In Runescape, the market makers trading the most volume would both actively project prices in-game while also listing prices (on a somewhat delayed basis) on the official forums.
However, unlike in the markets of today, in Runescape, the people standing in the trading pits actually had the advantage. The forums were clunky and cluttered. Arranging a location and world to meet someone could take at least five minutes. At worst, maybe the user who made the forum post was in bed. There was really no way to tell. However, standing in the pit, even while not trading, you had some understanding of order flow. Other people were doing price discovery for you. You just had to wait for suckers to post on the forums.
Oftentimes, and this was rarely publicized, experienced merchants would stalk the forums and pounce on any recently created post to buy or sell an item in which the poster had little idea of what the actual value was. This worked better for items that were decorative and low-volume, such as god-trimmed rune armor.
In addition, the concept of the “screen” could be extended beyond the official forums. There were also forums maintained by most of the Runescape fansites which allowed users much more freedom in terms of what they were allowed to post. There were many deals that originated in unofficial forums, though those users were, as a whole, much more knowledgeable about what they were doing than those posting on the official forums.
Note: Defining arbitrage as a risk-free profit, this is the strategy that comes closest to guaranteeing when deployed properly.
There were two versions of the game, Free-to-play (f2p) and Pay-to-play (p2p). The p2p game was much more expansive. There were more monsters to kill, new skills that only members could train, and additional quests. It used to cost only $5 a month. I used to tell my parents that it was the best money they had ever spent.
Many of the raw materials required to train f2p skills were much easier to obtain in member’s areas. In a cruel twist for non-members, there were certain items (namely, the “god-trimmed” runite armor pieces) that were only obtainable in members worlds but could still be used in f2p. Such items became highly desirable as status symbols.
This created disparity between F2P and P2P supply and demand curves. For items that were easier to obtain in member’s worlds (green dragonhide–used to train Crafting–being a prime example), people in f2p worlds were willing to pay more. They were willing to pay more because some of these items, such as green dragonhide used for Crafting, were often the most efficient ways for f2p players to gain experience. For items that were only obtainable in member’s worlds, the f2p demand was so strong that it actually drove the prices of the items in the member’s world!
Though I didn’t mention this before, World 2 was a members-only world. World 1 was a free-to-play world. The player base was generally much less serious about the game, but there were still wealthy players and there were still player-organized marketplaces. F2P players could not access the forums, further reducing their exposure to “real” prices.
One popular strategy was to buy items at their P2P values in World 2 and then hop over to World 1 and sell them, making an easy profit. The problem with dealing with f2p players was that they generally had less money to spend. Those trying to arb high-volume items would be stuck dealing with noobs buying odd-lots and frequently offering items instead of the preferable gold pieces. Since there were few items in the f2p game compared to the p2p game, there were more people trying to elbow their way into the most popular areas. On one hand, there were more suckers. On the other, it was a frustrating business where, if you failed in the f2p world, you’d have to log back into World 2 and cross the spread again in order to liquidate your inventory.
One example of how skill training differed in p2p and f2p was the Cooking skill. In f2p, you could only fish and cook Tuna, Lobster, and Swordfish. However, in p2p, those with advanced levels could also cook Monkfish, Sharks, and Karambwans. Cooking these members-only fish resulted in superior experience rates and, if eaten, these fish healed more hitpoints.
Note: Calling this “arbitrage” is a stretch.
Relative Value Arbitrage / Pair Trading
Relative value arbitrage is trading that attempts to take advantage of price disparities based on the relationship between two or more goods. For example, in commodities trading, the price of cattle is–by some measure–correlated to the price of commodities that are fed to the cattle. If you’re able to process data fast enough, you may be able to make money by reacting to a price move in corn by trading a relative amount of cattle, based on the relationship you have calculated.
There is a myriad of relationships between different items in Runescape. Even more than in modern markets because the items and skills in the game are meant to be combined and consumed together. Outside of basic supply and demand, there are few truly unknown variables. The trees will always grow back. The streams will always produce salmon in abundance. A rune platebody will always provide +72 crush defense.
For example, raw lobsters (120xp healing 12hp) may be trading 280 @ 290. Raw sharks (210xp healing 20hp) may be trading 700 @ 730. In 2007, neither had any utility beyond the cooking experience except it should be noted that sharks were not available in the f2p game. Lobsters, with a fair value of 285, provide .42 xp per gp spent. Sharks, with a fair value of 715, provide .27 xp per gp. This says nothing about the relationship between the crustacean and the aquatic predator. It does, however, communicate that there is a premium placed on sharks partially because cooking them helps you level up at a 75% faster rate.
Holding the value of the cooked fish as food constant, we can determine a relationship between the two raw fish on a basis of the relative value of cooking experience. Thus, if cooking experience demand changed, we might begin to form a model of how the lobster and shark prices correlate. So, in World 2 Falador, one might make more money by adjusting the fair value of lobster in correlation with the fair value of sharks. This would allow you to react more quickly and definitively to price moves in either commodity.
To arbitrate efficiently, a player should play on two accounts at the same time. One avatar would stand in the shark area making markets on sharks while the other avatar stood in the lobster area making markets on lobsters. This would allow for faster trading, as players who tried to be fishmongers lost valuable time as they tried to elicit from their customers whether they were trying to buy bass, salmon, or snails. Another advantage to using two accounts is that you never “show your hand.” If trading is thought of like a poker game, then you should strive to never communicate your intentions to another participant. In Runescape, you could trade using two or more accounts and you wouldn’t be breaking the rules.
The problem is that the arbitrageur must be objectively correct. Not necessarily at that moment, but by a meaningful point in time. If the price of lobsters goes up slightly, there’s no guarantee that it would have a meaningful impact on sharks. Then why am I even bothering to write this? These relationships would need to be observed over a long period of time. There was no formal data on the in-game economy, so you couldn’t just look back over the last three months and see that lobsters and sharks had some correlation.
Traders today may arbitrate small pricing discrepancies between different trading venues. In Runescape, this was also possible. You could make even more money by combining this strategy with the relative value example above. In fact, today, many of the most successful traders will employ both of these strategies in tandem.
To perform interexchange arb, you just needed to find two places of exchange where prices diverged. The specific examples that I already provided are f2p worlds and p2p worlds, the forums and W2 Falador. If you remember the Amulet of Glory strategy that I used to attempt with my buddy Vivek, you might be surprised to find out that W2 Falador wasn’t our primary venue.
Instead of Falador, where people were actively attempting to make markets, we went to Edgeville. In Edgeville, player killers would be banking after slaying opponents in the wilderness. Often, they’d be looking to pawn off items they just obtained so they could buy more supplies to continue player killing. The problem with this strategy is that, by the time I started doing it, I could barely make any money. In fact, over time, the supposedly one-sided demand gave way and merchants from the walled city of Falador crowded the outpost at the edge of the wilderness. Markets in Runescape were more efficient than one would think!
In another example of interexchange arbitrage, raw fish could sometimes be purchased from fishermen in the fishing guild bank at a slightly reduced price. On a good day, it could be taken to Falador for a profit. However, as the years advanced from 2005 onwards, players grew increasingly aware of the value of their commodities, even if they were spending all day on a dock thrusting a spear into some bubbling water.
In my next post, I’ll talk about dishonest ways to make money in the Runescape economy of days past.