What Is Arbitrage

One ounce, two prices, one moment

Arbitrage is buying a thing where it is cheaper and selling it where it is dearer, at the same moment. With example prices: one ounce of gold offered at 3380.10 on one venue and bid at 3380.60 on another in the same second. Buy on the first and sell on the second at once, and 50 cents an ounce is locked in, whatever the price does next, because the two trades cancel each other's exposure. A gap like this lasts as long as it takes the two venues to notice each other, and the noticing is the whole story.

One apple, two stalls

Picture one apple at two stalls. The stall on the left sells it for 1.00 and the stall on the right buys it for 1.20, across one street. Carry apples across and the street is the only work. Both stallholders can see across it, though, and the carrying itself closes the gap: buying on the left lifts the left price, selling on the right lowers the right one, and after a few trips the two prices meet. An arbitrage removes the thing it lives on, which is why the gaps are small and short.

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