Arbitrage

Arbitrage is the profit earned from buying and selling the same security or portfolio at different prices in quick succession or near simultaneously. It yields riskless profit.

Example

Say, an equity share is priced at Rs 61.50 on the NSE whereas the same share is selling for Rs 61.55 on the BSE.Assuming intra exchange trading is allowed, If one buys the stock on NSE and sells it on BSE, there is an arbitrage of Rs 0.05 to be earned on each share.

Know more

Arbitrage can be earned because of inefficiencies in money markets such as pricing inefficiency and information inefficiency.

However, in India, increasingly efficient markets, which are algorithm-driven, are reducing the chances to earn arbitrage. Any price discrepancy on the same security across markets are acted upon by algorithms of their information systems and corrected within seconds. The prices converge to their fair value (as perceived by the markets) quickly, as a result, and the scope to profit consistently from a simultaneous lower and higher price is slim.