A trading technique used by sophisticated investors to take advantage of differences for the same asset between different markets.
In general terms, arbitraging is recognizing price differences between markets and simultaneously buying in one market, while selling in another. In finance, arbitrage is mainly applied to trading of financial instruments such as bonds, stocks, derivatives, commodities and currencies. However, the term can extend beyond this scope to include any products and services that differ in value between different markets.
For example, arbitrage can involve the New York Stock Exchange (NYSE) and Chicago Mercantile Exchange (CME), if prices of corresponding stock and futures contract are not in sync. However, these differences tend to be small and do not last long.
There are risks involved in arbitrage however, as the speed of execution can lag price changes, closing the price difference or even reversing it before the arbitrage transaction finalizes.
An arbitrageur is a person who practices arbitrage.
