Arbitrage buying and selling an asset at the same time, to generate a profit exploiting the price imbalances. The market inefficiencies are the main target of all the Arbitrage trading strategies. No arbitrage chances would develop if the markets were perfectly efficient.
The main advantage of Arbitrage is that it has almost a risk-free but very small profit. So it's most suitable to hedge funds and large institutional investors as they trade with large amounts of money and can earn millions regardless of the small spread.
For any Arbitrage opportunity to develop, one of the following conditions should exist:
- The same asset is traded at different prices in different markets.
- Two assets with the same cash flow are trading at different prices.
- A considerable difference between an asset's expected price in the future and its current price exists.
If all the similar assets are priced appropriately across different markets an arbitrage-free or no-arbitrage condition occurs where there is no way to earn any reasonable profit without taking risk.
Arbitrage Trading is a method that's not predicting the future market movement but tries to identify where the market will go on a broker based on another price feed and profiting from those differences.
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