TRADING GLOSSARY

Arbitrage: risk-free profit from price differences

Arbitrage is the simultaneous purchase and sale of an asset in different markets to profit from a price difference. In theory, it is risk-free profit because you are buying low in one place and selling high in another at the same time.

How arbitrage works

Imagine a stock trades at $100 on the NYSE and $100.50 on the London Stock Exchange at the same moment. An arbitrageur buys 1,000 shares on NYSE for $100,000 and simultaneously sells 1,000 shares on LSE for $100,500, pocketing $500 in risk-free profit (minus transaction costs).

Types of arbitrage

Spatial arbitrage: Same asset, different locations (as in the example above). Triangular arbitrage: Exploiting pricing inconsistencies between three currency pairs. Statistical arbitrage: Using quantitative models to identify and exploit price inefficiencies between correlated assets. Merger arbitrage: Buying the target company and shorting the acquirer during announced mergers.

Why it is rare for retail traders

In modern markets, high-frequency trading firms and institutional arbitrageurs have access to faster technology and lower transaction costs. They eliminate most arbitrage opportunities within milliseconds. The remaining opportunities are typically too small to be profitable after accounting for retail trading costs, slippage, and execution delays. True arbitrage requires significant capital, low-latency infrastructure, and execution speed measured in microseconds.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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