When a company offers a dividend, it sounds like good news — a reward for being a shareholder. But dig beneath the surface, especially with optional dividends like scrip issues or DRIPs (Dividend Reinvestment Plans), and a different picture emerges. One where value is quietly extracted, and the usual suspects — investment banks and arbitrage desks — walk away with the spoils.
Welcome to the shadowy world of dividend arbitrage.
🧩 What’s Really Happening?
Some companies give shareholders a choice:
- Take your dividend in cash,
- Or take it in new shares, sometimes at a discount (e.g. 5% below the market price).
Sounds fair, right? Except here’s the catch.
Sophisticated players — think investment banks and hedge funds — spot this as an arbitrage opportunity. Here’s how they play it:
- Borrow shares from pension funds or other institutional holders.
- Elect to receive the discounted stock.
- Sell the new shares immediately at full market price.
- Pocket the difference — often risk-free, tax-advantaged, and done at scale.
This isn’t speculation. It’s a systematic extraction of value from the dividend process — all done legally, and invisibly to most investors.
🥇 Who Wins?
âś… Investment banks and arbitrage desks
They use their access to stock lending, nominee accounts, and high-frequency systems to monetise the margin between discounted and market-priced shares.
âś… The issuing company
They conserve cash when shareholders take shares instead of cash. But this short-term win comes with the long-term cost of share dilution.
❌ Who Loses?
❌ Passive investors, retail holders, pension savers
The vast majority of individuals default to cash — often without understanding their options. Platforms, pension trustees, and custodians rarely make it easy to opt in to discounted shares.
❌ The system
When investment banks recycle borrowed stock to inflate election volumes, it distorts market dynamics, erodes trust, and rewards financial engineering over productive investment.
🧮 Where Does the Value Go?
The 5% stock discount isn’t “free” — someone pays for it.
That someone is usually:
- The uninformed investor, defaulted into cash.
- The long-term saver, diluted through repeated issuance.
- The taxpayer, when this game is played across borders to exploit loopholes.
As with so much in capital markets, those with knowledge and access win — and those without, fund it.
🔍 When Does Arbitrage Stop?
It only stops when the incentive disappears or the system breaks:
- The discount shrinks below profitable thresholds.
- Stock lending dries up (unavailable, expensive, or blocked).
- The issuer changes terms, or
- Regulators clamp down (as some European jurisdictions have begun to do).
Until then, the game plays on — quietly, efficiently, and almost entirely unnoticed by the average investor.
🧠A Call to Awareness
This dividend game is a microcosm of how modern finance operates:
Complexity creates opacity.
Opacity creates opportunity.
Opportunity — taken at scale — creates inequality.
At the Academy of Life Planning, we teach people to see the system, so they can step outside of it — not to get rich by gaming it, but to live free from its illusions.
If you’re relying on capital markets for your future, be sure you’re not feeding someone else’s arbitrage. Empower yourself. Ask questions. Reclaim your agency.
Because in today’s financial system, the only truly passive income is someone else’s active gain — and it’s rarely yours.
Read more: When Transparency Threatens Profit: The Ethics of Scrip Dividend Optimisation.
The Internal Conflict You’re Not Meant to See
When a global bank houses both a custodian and a capital markets division, a silent tension arises:
🔹 Custodian Arm
- Serves pension funds, asset managers, retail platforms
- Fiduciary duty: act in the best interests of the client
- Should promote tools like Cash+ to optimise value for all investors
🔹 Investment Banking Arm
- Profits from optional dividend arbitrage
- Uses borrowed stock to elect discounted shares and harvest spreads
- Motivation: protect a highly profitable, low-risk trade
đź’Ą The Result?
Solutions like Scorpeo’s Cash+ or Euroclear Cash+® — which eliminate inefficiency and protect investor value — are often:
- Ignored
- Downplayed
- Or blocked outright
All to preserve internal profits.
📉 What’s at Stake?
- Billions in passive investor value lost each year
- A breach of trust and fiduciary responsibility
- Yet another example of value being siphoned upward through opaque structures
🔍 Lesson for Investors:
If your custodian isn’t offering optimal dividend processing, ask why — and who benefits from the status quo.
Your Money or Your Life
Unmask the highway robbers – Enjoy wealth in every area of your life!
By Steve Conley. Available on Amazon. Visit www.steve.conley.co.uk to find out more.
Academy of Life Planning 