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Profiting from the same thing being priced differently in two places by buying the cheaper one and selling the dearer one at the same time.
Why It Matters
Arbitrage is the classic 'free lunch' the market tries to eliminate. If a stock trades slightly cheaper on one venue than another, buying low and selling high simultaneously locks in the difference. In practice these gaps are tiny and vanish in milliseconds, so real arbitrage is dominated by fast algorithms. When textbooks say markets are 'efficient,' they largely mean arbitrageurs have already closed the obvious gaps.
Key Points
- Exploits a price difference for the same asset across venues or forms
- Gaps are usually tiny and close almost instantly
- Now largely the domain of fast, automated systems
Related Terms
Common Questions
Profiting from the same thing being priced differently in two places by buying the cheaper one and selling the dearer one at the same time. Arbitrage is the classic 'free lunch' the market tries to eliminate. If a stock trades slightly cheaper on one venue than another, buying low and selling high simultaneously locks in the difference.
Arbitrage is the classic 'free lunch' the market tries to eliminate. If a stock trades slightly cheaper on one venue than another, buying low and selling high simultaneously locks in the difference. In practice these gaps are tiny and vanish in milliseconds, so real arbitrage is dominated by fast algorithms. When textbooks say markets are 'efficient,' they largely mean arbitrageurs have already closed the obvious gaps.
Exploits a price difference for the same asset across venues or forms
Gaps are usually tiny and close almost instantly
Now largely the domain of fast, automated systems