ArbitrageArb
Arbitrage is profiting from a price difference for the same asset in two places by buying the cheaper and selling the dearer at the same time.
If the same thing sells for two prices, buy it cheap and sell it dear. That's arbitrage in one line. In practice the gaps are tiny, fleeting and fiercely competed for.
- Category
- Trading Strategies
- Reading time
- 3 min
- Also called
- Arb, Price arbitrage, Spatial arbitrage
- Updated
Arbitrage in plain words
Arbitrage means profiting from a price gap between the same or closely linked instruments; each trade usually earns only a small percentage.1
Many arbitrage strategies are automated and hunt for gaps between related markets, such as an ETF and the basket of shares it holds.2
Acting on mispricings helps push prices back to equilibrium.1
How an arbitrage trade works
Spot the gap
Find a price difference between identical or related instruments.1
Check the costs
Margins are often fractions of a penny per share, so costs decide everything.3
Buy and sell together
Trade both sides across products or markets at once.2
Hedge exposure
Arbitrage usually involves substantial hedging across products.2
Question assumptions
If assumptions are wrong, the trade could lose.1
Close the position
Exit as prices converge back toward equilibrium.1
Worked examples
Example 1 — Two exchanges
+$150A hypothetical asset is $100.00 on Exchange A and $100.30 on Exchange B. A trader buys and sells 1,000 units, paying $150 total costs.
| Gross | 1,000 × $0.30 = $300 |
| Costs | −$150 |
| Net | +$150 |
Profits from arbitrage are usually small in percentage terms.1
Example 2 — Triangular FX
+$12 before costsA hypothetical trader converts $10,000 through two other currencies and back, ending with $10,012.
| Start | $10,000 |
| End | $10,012 |
| Profit | +$12 |
Triangular arbitrage uses three currency exchanges ending in the starting currency.1
Example 3 — Merger deal breaks
−$4,000A hypothetical trader buys a takeover target at $48 expecting a $50 deal; the deal collapses and shares drop to $40 on 500 shares.
| Expected gain | +$1,000 |
| Actual | −$4,000 |
Merger arbitrage is speculative and event-driven, and wrong assumptions can cause a loss.1
Types of arbitrage
| Aspect | Pure arbitrage | Statistical / merger |
|---|---|---|
| Asset | Same or identical | Related or event-linked |
| Risk | Low but not zero | Meaningful |
| Profit per trade | Very small | Larger |
| Speed needed | Very high | Lower |
Where arbitrage happens
ETFs
Gaps between an Exchange-Traded Fund and its basket.
Futures
Spot vs Futures Contract price gaps.
Exchanges
Price differences across each Exchange.
Crypto perps
Trading Funding Rate gaps vs Spot Trading.
Advantages and disadvantages
Advantages
- Low directional risk when hedged.
- Helps markets price efficiently.
- Logic is simple to understand.
Disadvantages
- Tiny margins easily erased by costs.
- Fierce competition from fast firms.
- Not truly risk-free.
- Needs capital and fast execution.
Going deeper
Read as far as you need. Each level builds on the one before it.
Buy low, sell high at once
Beginner
Arbitrage profits from price differences between identical or related instruments.1
Not really risk-free
Intermediate
It's often called 'risk-free profit', but very few trades carry no risk.1
Competition and variants
Advanced
Institutional competition has cut margins to fractions of a penny; variants such as statistical arbitrage trade deviations from typical behaviour.1
Common mistakes
Ignoring costs
Fees larger than the gap.
Legging risk
Filling one side but not the other.
Assuming risk-free
Treating related assets as identical.
Slow execution
The gap closes before you trade.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Arbitrage exploits price gaps.
- Profits per trade are small.
- Costs and speed decide the outcome.
- It's rarely truly risk-free.
- It helps keep markets efficient.
Frequently asked questions
Is arbitrage legal?
Can retail traders do it?
What is statistical arbitrage?
Further learning
- Hedging
Offsetting risk across positions.
- Bid-Ask Spread
A key arbitrage cost.
- Correlation
The basis of statistical arbitrage.
- Futures Contract
Spot-futures arbitrage.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CMC Markets. Arbitrage in Trading: Definition & Strategies (opens in a new tab) Checked .
- U.S. Securities and Exchange Commission. Staff Report on Algorithmic Trading in U.S. Capital Markets (2020) (opens in a new tab) Checked .
- CMC Markets. What is algorithmic trading? A complete guide (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.