arbitrage

noun
ar·​bi·​trage | \ ˈär-bə-ˌträzh How to pronounce arbitrage (audio) \

Definition of arbitrage

 (Entry 1 of 2)

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

arbitrage

verb
arbitraged; arbitraging

Definition of arbitrage (Entry 2 of 2)

intransitive verb

: to engage in arbitrage

Examples of arbitrage in a Sentence

Recent Examples on the Web: Noun While arbitrage is nothing new, outlets like Amazon, eBay, Craigslist, Facebook Marketplace and Poshmark have turbocharged the business. CBS News, "How online sellers turn bargains into profits," 30 Nov. 2019 In less than one hour, the price of bitcoin fell from around $9,500 to $8,300, creating large arbitrage opportunities for cryptocurrency traders this week. Matthew De Silva, Quartz, "Why crypto hoaxes are so successful," 26 Sep. 2019 Boesky engaged in arbitrage, which is when someone simultaneously buys and sells an asset and profits from the difference. Aaliyah Gibson, chicagotribune.com, "Scams and shams: The biggest frauds in business," 1 Nov. 2019 Moving quickly against Silicon Valley's brilliant 21st Century labor arbitrage, California's state senate approved legislation on Wednesday intended to reclassify many more workers as employees. Aaron Pressman, Fortune, "The Gig Economy Is Under Attack, But Not for the First Time—Data Sheet," 12 Sep. 2019 There’s regulatory arbitrage, the long arm of the law, and the politicisation of economic investigative agencies such as the enforcement directorate. Shivam Vij, Quartz India, "Why haven’t others in India Inc questioned the Modi government, like Rahul Bajaj did?," 1 Dec. 2019 The traders arrange deals that generate profit by lowering taxes on dividends, a practice known as dividend arbitrage. Washington Post, "Barclays Chases New Growth With Bad Old Habits," 31 May 2019 When this risk recedes, the reality of Anthem’s critical role will shine through, and the pricing arbitrage will resolve in favor of those who own Anthem today. Adam Seessel, Fortune, "Valuation: Why Health Insurer Anthem Is Worth Investing In," 19 Nov. 2019 Yeh, 53, joined Citadel in 1993, three years after Griffin founded the firm, and helped build its statistical arbitrage business in the mid-1990s, Citadel said. Lauren Zumbach, chicagotribune.com, "Ken Griffin’s Citadel names new president, co-chief investment officer," 13 Nov. 2019 Recent Examples on the Web: Verb Localized cancer, headline risk—call it what you will, these episodes create wrinkles in the investment time-space continuum that long-term investors can use to arbitrage between perception and reality. Adam Seessel, Fortune, "Valuation: Why Health Insurer Anthem Is Worth Investing In," 19 Nov. 2019 Were this only a matter of firms arbitraging better rates and swapping back to dollars, the Americans would be dominated by banks. Washington Post, "Beware the Buyer’s Strike in Corporate Bonds," 3 Apr. 2019 One explanation is that foreigners have direct access to the market, and so large price gaps can be arbitraged away quickly. Nathaniel Taplin, WSJ, "A Chinese Oil Slick for the Dollar?," 18 Sep. 2018 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

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.

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First Known Use of arbitrage

Noun

1875, in the meaning defined at sense 1

Verb

1857, in the meaning defined above

History and Etymology for arbitrage

Noun

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

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Time Traveler for arbitrage

Time Traveler

The first known use of arbitrage was in 1857

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Statistics for arbitrage

Last Updated

5 Jan 2020

Cite this Entry

“Arbitrage.” The Merriam-Webster.com Dictionary, Merriam-Webster Inc., https://www.merriam-webster.com/dictionary/arbitrage. Accessed 19 January 2020.

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More Definitions for arbitrage

arbitrage

noun

Financial Definition of arbitrage

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

noun
How to pronounce arbitrage (audio)

English Language Learners Definition of arbitrage

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

arbitrage

noun
ar·​bi·​trage | \ ˈär-bə-ˌträzh How to pronounce arbitrage (audio) \

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

History and Etymology for arbitrage

French, literally, arbitration, decision-making

More from Merriam-Webster on arbitrage

Rhyming Dictionary: Words that rhyme with arbitrage

Britannica.com: Encyclopedia article about arbitrage

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