Same thing, two prices, side by side:buy the cheap one, sell the wide.
The simultaneous purchase and sale of the same asset in different markets to capture a small difference in price.
Such differences tend to be small and short-lived and can be smaller than the cost of dealing, and brokers’ terms often restrict strategies that rely on price differences between brokers.
In plain words
Arbitrage means buying something in one place and selling the same thing in another place at the same moment, to capture a difference in price between the two. The buying and selling themselves push the two prices back together, so such differences tend to be small and short-lived.
See it move
Difference: the distance between Higher price and Lower price
Why it matters
Arbitrage is the reason one instrument is priced almost identically across venues, and the reason cross rates stay consistent with the rates they are derived from. For an individual trader, the differences seen on a screen are usually smaller than the cost of dealing, and a broker’s terms may restrict strategies that rely on delayed prices.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
In an invented case the same pair can be bought at 1.1000 in one market and sold at 1.1003 in another.
- 1Buy 100,000 units at 1.1000
- 2Sell 100,000 units at 1.1003
- 3Difference = 0.0003 = 3 pips; 3 × 10 = 30 US dollars before costs
- 4If dealing costs total 2 pips, 1 pip remains10 US dollars
The apparent 30 US dollars shrinks to 10 once costs are counted, and vanishes if either price moves before both orders are filled.
A common mistake
Arbitrage is often described as profit without risk. In practice the two trades are never perfectly simultaneous, so a price can move between them, and costs can exceed the difference.
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Educational information, not investment advice or a recommendation to trade.