Arbitrage

Arbitrage is the act of buying and selling an asset in different markets in order to take advantage of price differences in those markets. When there are a number of parties engaged in arbitrage on an ongoing basis, the quoted price across multiple markets tends to converge until the pricing differences no longer allow for an arbitrage profit. For example, a person finds that a sailboat can be purchased in Seattle for $50,000 and sold in Miami for $80,000. The cost to transport the sailboat to Miami is $10,000, so there is an opportunity for an arbitrage profit of $20,000 per sailboat. The arbitrage concept is especially prevalent in the financial markets, where automated trading systems spot pricing anomalies almost instantly and create arbitrage transactions to profit from them.