Arbitrage occurs when an asset is priced differently in two or more places at the same time. Traders buy the asset where it is cheaper and sell it where it is more expensive. This difference in price creates a potential profit, assuming the trades can be executed quickly enough.
Arbitrage can happen in stocks, currencies, commodities, bonds, and cryptocurrencies. These opportunities often exist for a short period because once traders act on them, prices tend to move closer together. To capture these differences efficiently, many traders use automated systems that monitor multiple markets at high speed.
There are also different types of arbitrage:
Arbitrage helps keep financial markets efficient. When traders act on price differences, they help align prices across markets, reduce discrepancies, and improve liquidity.
Traders need fast data, quick execution, and reliable access to multiple markets. They also need to account for fees, latency, and liquidity to ensure the opportunity is actually profitable.
Arbitrage reduces many risks, but it is not completely risk-free. Delays, fees, execution problems, and sudden price changes can affect profitability.
A stock trades for $50 on one exchange and $50.30 on another. A trader buys it at $50 and sells it at $50.30. If the trades execute correctly and quickly, the difference becomes profit.
