If arbitrage is like...what you do....then you’re an arbitrageur. (Side Note: Doesn’t this sound like a cool new term for being a spy? "No, she doesn’t work at the bank anymore. She’s an international arbitrageur on a mission to fight for justice while snorkeling in a country you’ve never heard of called X.")
If you’re an arbitrageur, you make it a thing to look for price differentials in two different markets. These are places where the market is out of balance. Same stocks, same commodities. Two different prices. (One tonne in England is selling at $60, and the same tonne in Nairobi is selling at $60.02.)
You buy one stock in one place and sell the other simultaneously in another...and make a profit. Some say that this was easier to do before communications became effective (i.e., technology), because back in the day there weren’t computers to catch these mistakes. That said, arbitrage still exists on a different level, which is why arbitrage trading programs are um...helpful. They’re fast enough to catch these mistakes before the price differentials are caught.
There used to be a darker skeezier side to this now-small industry; see the prison cell of Ivan Boesky for details...HIS version of arbitrage was to gather inside information regarding mergers and acquisitions and basically short the buyer as he went long the seller. And that ended up being a hugely lucrative (if illegal) system that became the most famous arbitrageur case in modern Wall Street history.
Related or Semi-related Video
Finance: What is Arbitrage?22228 Views
finance a la shmoop what is arbitrage? not yourbritage or mybitrage but
arbitrage what it's been a while since we conjugated anything around here oh ok [Man talking about arbitrage]
so moving on arbitrage is a riskless trade you make guaranteed profits just
for being on top of things or in the right place at the right time or you're
there when opportunity comes a-knockin think about the stock exchanges in the [Men working in stock exchange]
pre-internet era around the world communication well it was relatively
slow and expensive back then especially when it came to sharing data one [Man talking into olden microphone]
relatively easy arbitrage or riskless trade opportunity that came about was
when stocks traded at one price on the various european exchanges versus the
prices it traded at on the US exchanges like shares of IBM might have been [Share price graph of IBM]
offered for sale at $165 32 cents on the london stock exchange even net of
currency conversion prices remember the Brits were on the pound system but in
the US investors were paying $165 47 cents a share
so an easy 15 cents a share was made all day long in buying the shares of IBM in
London and then just selling him back here in New York well both sides of the
trade were made at the same time it was riskless it was arbitrage and arbitrage
became a whole industry for a while until the capital markets went to work
and spreads tightened as communication got more liquid and people sprayed a [Spreads word becomes narrower]
bunch of wd-40 on information passing around the world and then that 15 cent [15 cents transfers from US to England]
spread from London to New York became more like a penny or a tenth of a penny
or at least close enough of a spread so that it was no longer worth bothering to
try and make a buck or a billion whatever those arbitrageours made in
those days
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