Arbitrage refers to the practice of simultaneously buying and selling the same asset on different exchanges to profit from differences in prices. The asset is purchased on an exchange offering a lower price and then immediately sold on an exchange offering a higher price, with the difference between the two prices being the profit the trader makes. As a result, this strategy is considered to be a relatively low risk, profitable endeavor.
Opportunities for arbitrage exist as a result of an inefficient market, meaning one in which an asset’s price does not accurately reflect its true value. When traders begin to arbitrage, the market quickly corrects itself and prices are adjusted. Thus, arbitrage is a force necessary to correct any inefficiencies in a market.