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Arbitrage

A practice of taking advantage of differences in price of the same commodity in two or more markets or exchanges. For example, cryptocurrency prices on Korean exchanges can be different from those on US exchanges. An arbitrage trader would be in both markets in order to buy in one and sell in another for profit.

What is an "Arbitrage"?

Arbitrage is the practice of taking advantage of the price differences of an asset over two or more markets or exchanges. The execution of an arbitrage strategy usually involves the near-instantaneous buying and selling of the same asset on different markets (buying low on exchange A, selling high on exchange B) and capturing the difference in price.

The main reason for the existence of arbitrage is usually market inefficiencies. Arbitrageurs profit from this by making markets more efficient, ensuring that the same asset is similarly priced across different exchanges. By buying on the cheaper exchange and selling on the more expensive one, arbitrageurs narrow the "spread" that exists between these exchanges, thus reducing the opportunity for arbitrage and therefore making markets more efficient.

Given the nature of the way that arbitrage is executed (buying and selling the same quantity on different exchanges), the arbitrageur takes little to no price risk on the strategy. However, there is risk involved in arbitrage, which comes from needing to execute the strategy near-instantaneously and the cost of trading (commissions). Arbitrageurs usually end up paying a lot in commissions as every unit of trade requires the trader to pay the different exchanges he/she is trading on.

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