August 10th, 2021 | Updated on September 16th, 2021
Arbitrage is the process of simultaneous buying and selling of an asset from different platforms, exchanges or locations to cash in on the price difference (usually small in percentage terms). While getting into an arbitrage trade, the quantity of the underlying asset bought and sold should be the same.
Only the price difference is captured as the net pay-off from the trade. The pay-off should be large enough to cover the costs involved in executing the trades (i.e. transaction costs). Else, it won’t make sense for the trader to initiate the trade in the first place.