Arbitraging

Arbitraging is a trading strategy that seeks to profit from small price differences in the same or similar financial instruments on different markets or in different forms. The core principle is to simultaneously buy an asset in one market and sell it in another where it is priced slightly higher, locking in a risk-free profit.

For an arbitrage opportunity to exist, there must be a discrepancy in prices for the identical or equivalent asset. This might occur due to differences in supply and demand across exchanges, currency exchange rate fluctuations, or variations in the pricing of derivatives compared to their underlying assets. Arbitrageurs aim to exploit these temporary inefficiencies before they are corrected by the market.

Successful arbitrage requires swift execution and often significant capital. Transactions must be completed quickly to capture the price difference before it disappears. Many arbitrage strategies are automated using sophisticated computer programs that monitor markets for these fleeting opportunities. While theoretically risk-free, practical arbitrage can involve execution risks, transaction costs, and the potential for rapid market shifts that can erode or eliminate the intended profit. Common forms include statistical arbitrage, merger arbitrage, and retail arbitrage.