Arbitrage Definition

Dictionary of Financial Terms

The practice of simultaneously purchasing and selling securities in two separate financial markets in order to profit from price differences between them. For example, an arbitrageur would buy a security at one price on the London Stock Exchange and sell the same security at a higher price on the New York Stock Exchange. "Arbs" also get busy in mergers and acquisitions (M&A), mostly by shorting the stock of companies making an acquisition and simultaneously buying shares in the takeover target.

Usually the price disparity is seemingly insignificant and normally would be consumed by transaction costs, so most arbitrage is done by big financial institutions, which have low transaction costs and can move huge volumes.

The arbs depend on computers. When all the arbs move in the same direction, the overall market can go haywire.

Definitions of Financial Terms