is a trading strategy whereby a trader sells a security in oneand buys the same security in another market.
The practice ofmarket arbitrageis based on assuming that anassettraded worldwide is priced differently in different markets. That is, the samestockmay have amarket valuein Europe that is different from its value on theNew York Stock Exchange (NYSE).
For example, if Company XYZs stock trades at $5.00 per share on the New York Stock Exchange (NYSE) and the equivalent of $5.05 on the London Stock Exchange (LSE), anarbitrageurwould purchase the stock for $5 on theNYSEand sell it on the LSE for $5.05 — pocketing the difference of $0.05 per share.
In theory, the prices for the same asset on both exchanges should be equal at all times, but market arbitrage opportunities arise when theyre not. Market arbitrage is a riskless activity because traders are simply buying and selling equal amounts of the same asset at the same time. For this reason,arbitrageis often referred to as risklessprofit.
Market arbitrageurs assume the risk that the price of a security in the offsettingmarketmay rise unexpectedly and result in a loss. In theory, market arbitrage opportunities should only exist for a short time because security prices adjust according to forces of supply and demand.
Primarily, large institutional investors andare the ones capable of profiting from market arbitrage opportunities. The spread between unequally priced securities is usually only a few cents, so very large amounts ofcapitalare required in order to make substantial profits.
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