Arbitrage is a trading strategy that seeks to exploit price discrepancies of the same or similar assets across different markets or exchanges. Typically, an arbitrageur simultaneously buys and sells an asset in different markets to profit from the price differential. For example, if a stock is priced lower on one exchange than another, a trader can purchase the stock at the lower price while selling it at the higher price, thus profiting from the transaction. While arbitrage plays a crucial role in market efficiency by aligning prices across venues, it generally requires rapid execution and low transaction costs to be profitable. Participants in arbitrage strategies may include hedge funds, sophisticated traders, and automated trading systems, which can capitalize on fleeting opportunities.
