The simultaneous buying and selling of an asset in different markets to profit from a temporary price difference.
Exploits market inefficiencies.
Because price discrepancies are usually small (fractions of a percent), arbitrage strategies generally require massive trade volumes and very fast algorithmic execution to be truly profitable.
Types
Pure Arbitrage:
Buying and instantly selling the exact same asset (like Bitcoin or gold) across two different exchanges or markets to capture the price difference.
Statistical Arbitrage:
A quantitative strategy used by algorithmic traders to exploit pricing discrepancies between historically correlated assets. It often involves exploiting minor, temporary deviations in price.
Merger Arbitrage:
A strategy used during acquisitions. Traders buy the stock of a target company, which usually trades below the agreed-upon buyout price, and cash in on the premium when the merger closes.
Triangular Arbitrage:
A currency trading strategy where a trader exploits pricing discrepancies between three different foreign currencies to lock in a risk-free profit.
