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What is arbitrage? (‘arb trading’)

Arbitrage, also known as “arb trading,” is a trading strategy that involves taking advantage of differences in the price of a security or asset in different markets or between different financial instruments. Arbitrage opportunities can arise when the same security or asset is being traded at different prices in different markets, or when there are discrepancies between the prices of related financial instruments, such as futures and options.

Arbitrage traders seek to profit from these price differences by buying the security or asset at a lower price and selling it at a higher price, or by buying and selling related financial instruments in a way that captures the price difference.

For example, consider a scenario where a stock is trading at $100 on the New York Stock Exchange (NYSE) and $99 on the NASDAQ. An arbitrage trader could buy the stock on the NASDAQ for $99 and sell it on the NYSE for $100, capturing a profit of $1 per share.

Arbitrage can be a complex and sophisticated trading strategy, and it requires a deep understanding of the markets and the ability to execute trades quickly to take advantage of fleeting price discrepancies. It is often used by professional traders and hedge funds, but it can also be employed by individual investors with a high level of expertise.

“On balance, the financial system subracts value from society.” – John C. Bogle

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