1

arbitrage

play
noun ar·bi·trage \ ˈär-bə-ˌträzh \
Updated on: 26 Jul 2017

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

Recent Examples of arbitrage from the Web

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


2

arbitrage

verb

Definition of arbitrage

arbitraged; arbitraging
intransitive verb
:to engage in arbitrage

Recent Examples of arbitrage from the Web

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.

First Known Use of arbitrage

1857


Financial Definition of ARBITRAGE

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.


ARBITRAGE Defined for English Language Learners

arbitrage

play
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

play
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

Origin and Etymology of arbitrage

French, literally, arbitration, decision-making


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