Arbitrage
Market Microstructure glossary · High Frequency Dynamics & Latency Arbitrage
Definition
The simultaneous purchase and sale of related instruments to profit from price discrepancies. Pure arbitrage is riskless; practical arbitrage involves implementation, basis, and model risk.
Arbitrage in plain English
Arbitrage is spotting the same (or nearly the same) thing priced differently in two places and locking in the gap by buying cheap and selling dear at the same moment. Picture the identical candy bar selling for $1 at one store and $1.20 next door: buy at $1, instantly sell at $1.20, pocket the difference. 'Pure' arbitrage is risk-free profit, but in the real world you face frictions, the two things may not be perfectly identical (basis risk), your pricing model might be wrong, and prices can move before you finish. So true free money is rare and vanishes fast as traders pounce on it.
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