Arbitrage
Arbitrage#
Definition#
Arbitrage is a strategy that exploits price differences for the same asset across two separate markets to generate a theoretically risk-free profit. For example, if Apple stock trades at $185.00 in New York and $185.50 in London (in dollar terms), an arbitrageur buys in New York and simultaneously sells in London for a gain of $0.50 per share.
In practice, arbitrage opportunities are rare and short-lived, because high-frequency trading algorithms detect and close them within milliseconds. Arbitrage contributes to market efficiency by eliminating price discrepancies. Common variants include crypto arbitrage (between exchanges), merger arbitrage, and statistical arbitrage (pairs trading).
Key Takeaway
Arbitrage is the mechanism that keeps prices consistent across different markets. For retail investors, genuine arbitrage opportunities are all but non-existent — algorithms capture them in microseconds. Be wary of any "guaranteed arbitrage strategy": these are frequently scams.
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