Arbitrage

Arbitrage is the practice of taking advantage of a price difference for the same, or a very similar, asset that exists in two different places at the same time. If something is priced at $100 on one market and $100.20 on another, an arbitrageur buys where it's cheap and sells where it's expensive, pocketing the difference.

The mechanics rely on speed and simultaneity. Because the price gap is usually tiny and temporary, arbitrage trades are typically executed within seconds or fractions of a second, often by automated systems rather than a person clicking buttons. Once enough traders spot the gap and act on it, buying pushes the cheap price up and selling pushes the expensive price down, until the two converge and the opportunity disappears. This self-correcting effect is one reason markets tend to stay efficient.

The nuance beginners miss is that "true" arbitrage is supposed to be risk-free, since you're locking in both sides of the trade at once. In practice, what most retail traders call arbitrage carries some risk: prices can move between the moment you spot the gap and the moment both orders fill, fees can eat the margin, or the two assets aren't quite as identical as they seemed (a stock and its related futures contract, for example, or the same crypto coin on two exchanges with different withdrawal delays). This is sometimes called "risk arbitrage" to distinguish it from the textbook version.

Arbitrage also shows up in less obvious forms, like buying a stock in one currency and selling a cross-listed version of it in another, or trading a merger target against the acquiring company's stock before a deal closes. In every case, the core idea is the same: exploit a mispricing between two things that should, logically, be worth the same.