arbitrage

noun ar·bi·trage \ ˈär-bə-ˌträzh \

|Updated on: 20 Jul 2018

Definition of arbitrage

1 : the nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies

2 : the purchase of the stock of a takeover target especially with a view to selling it profitably to the raider

See arbitrage defined for English-language learners

Recent Examples of arbitrage from the Web

Merger arbitrage funds, which bet on whether corporate deals will come to fruition, gained 2.63 percent.

— james b. stewart, New York Times, "Hedge Funds Should Be Thriving Right Now. They Aren’t.," 12 July 2018
Plenty relied on arbitrage, basing production in places with cheap labour and booking profits in countries with low taxes.

— The Economist, "Canaries in the coal mine," 14 June 2018
Across the area, bettors on the Golden Knights include nonhockey fans who purchased $5 futures bets to commemorate the team’s inaugural season and sophisticated bettors who employed complex arbitrage strategies in search of a healthy profit.

— matt rybaltowski, New York Times, "Golden Betting Slips for the Golden Knights," 30 May 2018
The arbitrage strategies typically involve buying shares of announced acquisition targets while shorting their acquirers to profit from the uncertainty of deals not going through.

— laurence fletcher, WSJ, "Merger Funds Missing Out on M&A Boom," 1 Apr. 2018
Macro, distressed debt, long-short, dollar-event-driven, cryptocurrency arbitrage?

— andy kessler, WSJ, "George Costanza’s Investment Tips," 11 Mar. 2018
Critics argue that the company does little more than corporate real estate arbitrage — leasing a space, spiffing it up, then subleasing it out to other tenants.

— david gelles, New York Times, "The WeWork Manifesto: First, Office Space. Next, the World.," 17 Feb. 2018
On the other hand, SBBS could actually make sovereign-bond markets more liquid by providing alternative means of collateral, hedging and arbitrage.

— The Economist, "A safe asset is devised for the euro zone," 1 Feb. 2018
In some other categories, such as macro funds or merger arbitrage, returns are entirely dependent on the manager’s skill.

— The Economist, "ButtonwoodThe hedge-fund delusion that grips pension-fund managers," 18 Jan. 2018

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'arbitrage.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of arbitrage

borrowed from French, literally, "decision-making, judgment," going back to Old French, "judgment pronounced by an arbiter," from arbitrer "to pass judgment" (borrowed from Latin arbitrārī "to consider, judge, decide," verbal derivative of arbitr-, arbiter "onlooker, arbiter") + -age -age

NEW! Time Traveler

First Known Use: 1875

in the meaning defined at sense 1

See Words from the same year

Other Business Terms

amortize, caveat emptor, clearinghouse, divest, due diligence, emolument, green-collar, marque, overhead, perquisite

arbitrage

verb

Definition of arbitrage

arbitraged; arbitraging

intransitive verb

: to engage in arbitrage

Recent Examples of arbitrage from the Web

One risk is that, as local investors clamour to buy them, CDRs will trade at a huge premium to their foreign counterparts. Because of capital controls, there is no channel for arbitraging between onshore and offshore markets.

— The Economist, "China tries to lure its tech firms into listing at home," 10 May 2018
As Ars Technica points out, arbitraging cheap power is a widespread business tactic in industries as diverse as aluminum production and marijuana cultivation.

— david z. morris, Fortune, "Bitcoin Miners Can Now Be Charged Extra for Electricity, New York Power Authorities Say," 17 Mar. 2018
Of course, cryptocurrency mining is hardly the first industry to arbitrage electricity prices to make some good's production more profitable.

— megan geuss, Ars Technica, "New York power companies can now charge Bitcoin miners more," 16 Mar. 2018
Inside the Big Plan to Make Ethereum Go Mainstream Share this episode with your friends Another option is arbitraging price differences between Korean exchanges, Bae said.

— julie verhage, Bloomberg.com, "Bitcoin's 43% Arbitrage Trade Is a Lot Tougher Than It Looks," 9 Jan. 2018
Another puzzle with anomalies is why they are not arbitraged away.

— The Economist, "“Factor investing” gains popularity," 1 Feb. 2018
Korea’s Forex Rules To arbitrage the price gaps between bitcoin venues in Korea and elsewhere, local traders must first exchange their won into a foreign currency, such as the dollar or euro, that’s accepted by overseas cryptocurrency venues.

— julie verhage, Bloomberg.com, "Bitcoin's 43% Arbitrage Trade Is a Lot Tougher Than It Looks," 9 Jan. 2018
Sell the beer at a reasonable price (whatever that means), and all of the sudden it's being arbitraged left and right.

— aaron goldfarb, Esquire, "Affordable Beer Is Dead. Long Live Luxury Beer.," 6 Oct. 2015
Flexe is arbitraging the mismatch between supply and demand, taking a commission for each transaction.

— spencer soper, Bloomberg.com, "This Startup is the Airbnb of Warehouses and Has Amazon in Its Sights," 11 May 2017

First Known Use of arbitrage

1857

in the meaning defined above

See Words from the same year

NEW! Time Traveler

Other Business Terms

amortize, caveat emptor, clearinghouse, divest, due diligence, emolument, green-collar, marque, overhead, perquisite

Financial Definition of ARBITRAGE

arbitrage

noun

What It Is

Arbitrage is the process of exploiting differences in the price of an asset by simultaneously buying and selling it. In the process the arbitrageur pockets a risk-free return. Differences in prices usually occur because of imperfect dissemination of information.

How It Works

For example, if Company XYZ's 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), an arbitrageur would purchase the stock for $5 on the NYSE and sell it on the LSE for $5.05 -- pocketing the difference of $0.05 per share.

Theoretically, the prices on both exchanges should be the same at all times, but arbitrage opportunities arise when they're not. In theory, arbitrage is a riskless activity because traders are simply buying and selling the same amount of the same asset at the same time. For this reason, arbitrage is often referred to as "riskless profit."

Arbitrageurs also try to exploit price differences created by mergers. In some cases, they purchase the shares of companies that are the targets of purchase offers, hoping to pocket the difference between the trading price and the eventual cash payment resulting from the merger. Even though this type of strategy is referred to as "arbitrage," it's a bit of a misnomer because there's always a risk that a merger will not actually happen. Because it's not risk-free, merger arbitrage is not "arbitrage" in its truest sense.

Why It Matters

Only large institutional investors and hedge funds are capable of taking advantage of arbitrage opportunities. Because they're able to trade large blocks of shares, they can pocket millions in arbitrage profits even if the spread between two security prices is small (and it usually is just pennies).

By contrast, individual investors typically don't have the large sums of money needed to take advantage of arbitrage opportunities, and trading fees would eat up any profits an individual arbitrageur hoped to secure. Institutional investors aren't burdened by these same limitations.

Of course, small investors and entrepreneurs take advantage of much smaller arbitrage opportunities every single day. For example, if you've ever purchased a bargain-priced item at a garage sale or flea market, and then sold that item for a higher price on eBay, then you've profited from a form of arbitrage.

The main creator of arbitrage opportunity used to be a lack of real-time communication about prices in other markets, but modern technology has reduced the number of arbitrage opportunities out there. The relatively few arbitrage opportunities that do exist are elusive and don't last for long -- when people realize that a security is cheaper in one market than another, their interest in exploiting the opportunity will drive up the price of the "cheap" security and drive down the price of the "expensive" security until there is no longer a price difference. In this manner, arbitrage does a good job of ensuring equilibrium in the markets.

Source: Investing Answers

ARBITRAGE Defined for English Language Learners

arbitrage

noun

Definition of arbitrage for English Language Learners

business : the practice of buying something (such as foreign money, gold, etc.) in one place and selling it almost immediately in another place where it is worth more

Law Dictionary

arbitrage

noun ar·bi·trage \ ˈär-bə-ˌträzh \

legal Definition of arbitrage

1 : the purchase of a security, commodity, or foreign currency in one market for the purpose of immediately selling it at a higher price in another market

2 : the purchase of the stock of a takeover target especially for the purpose of selling it to the raider for a profit