What is the market arbitration?

Market Arbitration is a process of using differences in prices of the same commodity in different markets. It allows people to notice a hole to make a quick profit. However, the cost of purchasing and selling commodities can reduce real profits. The most common are financial products such as stocks and bonds. However, arbitration can work with physical commodities such as gold, oil or food. It can also work with competing foreign currencies or even a sports bet. For example, gold can trade for $ 1 (USD) per ounce in one stock market and $ 1.05 in another market. Someone buys stocks on the first market and is immediately sold on the second market would achieve some profit.

In its purest form, the market arbitration would include two transactions that occur simultaneously. This prevents any risk of changing prices during the process and means that the buyer and selling commodity is guaranteed to earn a fixed amount of money. In fact, although most such trades are done electronically, there will be a few seconds between the two transactions or a minute of delay. There is a small risk that prices will change during this delay and make less profitable agreement, so many people who use arbitration will focus on agreements with sufficient profit range that the agreements will change again.

There are other limits of money that can be done. Because most markets have a different price for people who want to buy and people who want to sell can overlap that will erase the potential profit from the total average trading price. There, there is also usually transaction costs with each trade, which of course means two sets of costs for someone trying to arbitration. This means that the price differences on the markets must be much larger to make the agreement profitable.

usually market arbitration includes one product, but that's not always. For example, exchange rates for three currencies may vary from two different markets. Simply buying and selling one currency does not have to make a profit. Exchange of currency and for currency bOn the first market A, it exchanges the currency B for currency C on the second market, and then finally exchanges the currency C for currency and on the first market, it can end with more than the original sum of the currency A. This is known as the Triangle Arbitrage.

In perfect economic theory, market arbitration will reduce the differences in prices between different markets. Where there is a difference, people will theoretically assure that they will use it until the prices are so close that Arbitrage will no longer be valuable. In fact, human nature means that many or most traders will rather risk due to potentially greater profits.