Arbitrage

Arbitrage is the process of taking both sides of a trade simultaneously in order to realize an immediate and riskless profit. This is done by selling an asset in one market where the price is higher and buying it in another market where the price is lower. Arbitrage can also be achieved by trading assets that are technically different, but have the same underlying asset, such as derivatives.

Traders looking to extract value from an arbitrage opportunity may be responsible for covering the spread and paying trading fees on both markets they are using to trade. This means that slight differences in prices do not necessarily indicate an arbitrage opportunity.

The result of arbitrage is the two differing prices in different markets moving towards each other due to increased selling where the price was higher and increased buying where the price was lower. This price movement will eliminate the arbitrage opportunity. Arbitrage opportunities are usually realized very quickly, so many traders use algorithmic trading to profit from these opportunities quickly.