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Finance: What is Arbitrage? 22228 Views
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What is Arbitrage? Arbitrage is a trading strategy used to make risk-free money. The investor buys a security in one market and sells it in another market at the same exact time that a change in price or pricing error occurs.
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Transcript
- 00:00
finance a la shmoop what is arbitrage? not yourbritage or mybitrage but
- 00:08
arbitrage what it's been a while since we conjugated anything around here oh ok [Man talking about arbitrage]
- 00:14
so moving on arbitrage is a riskless trade you make guaranteed profits just
- 00:20
for being on top of things or in the right place at the right time or you're
- 00:25
there when opportunity comes a-knockin think about the stock exchanges in the [Men working in stock exchange]
Full Transcript
- 00:29
pre-internet era around the world communication well it was relatively
- 00:34
slow and expensive back then especially when it came to sharing data one [Man talking into olden microphone]
- 00:38
relatively easy arbitrage or riskless trade opportunity that came about was
- 00:44
when stocks traded at one price on the various european exchanges versus the
- 00:50
prices it traded at on the US exchanges like shares of IBM might have been [Share price graph of IBM]
- 00:55
offered for sale at $165 32 cents on the london stock exchange even net of
- 01:01
currency conversion prices remember the Brits were on the pound system but in
- 01:05
the US investors were paying $165 47 cents a share
- 01:10
so an easy 15 cents a share was made all day long in buying the shares of IBM in
- 01:16
London and then just selling him back here in New York well both sides of the
- 01:20
trade were made at the same time it was riskless it was arbitrage and arbitrage
- 01:26
became a whole industry for a while until the capital markets went to work
- 01:30
and spreads tightened as communication got more liquid and people sprayed a [Spreads word becomes narrower]
- 01:35
bunch of wd-40 on information passing around the world and then that 15 cent [15 cents transfers from US to England]
- 01:40
spread from London to New York became more like a penny or a tenth of a penny
- 01:44
or at least close enough of a spread so that it was no longer worth bothering to
- 01:49
try and make a buck or a billion whatever those arbitrageours made in
- 01:53
those days
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