Arbitrage

Arbitrage traders profit on price discrepancies by buying an asset in one market at a lower price and selling it in another at a higher price.

Given the nature of arbitrage (buying and selling the same amount on separate markets), the arbitrageur takes little to no price risk with the technique. However, there is danger associated with arbitrage, which stems from the requirement to execute the plan very instantly, as well as the cost of trading (commissions). Arbitrageurs frequently spend a lot of money on commissions since each unit of transaction involves the trader paying the many exchanges with which he or she is dealing.

The advancement of technology, such as automated trading, tends to destroy arbitrage trading possibilities much more quickly, making the process more difficult for traders. However, arbitrage will continue to play an essential role as long as markets are not completely efficient.