Arbitrage takes advantage of market inefficiencies and exploits short-lived variations in the price of identical or similar financial instruments in different markets or vehicles. Arbitrage trades are commonly made in stocks, commodities, and currencies, but can be accomplished with any asset.
⭐How Does Arbitrage Work?
Arbitrage is trading that exploits the tiny differences in price between identical or similar assets in two or more markets. The arbitrage trader buys the asset in one market and sells it in the other market at the same time to pocket the difference between the two prices.
Arbitrageurs, as arbitrage traders are called, usually work on behalf of large financial institutions. It usually involves trading a substantial amount of money, and the split-second opportunities it offers can be identified and acted upon only with highly sophisticated software.
⭐Why Is Arbitrage Important?
In the course of making a profit, arbitrage traders enhance the efficiency of the financial markets. As they buy and sell, the price differences between identical or similar assets narrow.
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