What is arbitrage
Arbitrage means buying and selling the same asset, or equivalent assets, at the same moment in different places to lock in a profit from a price difference, with no market risk.
Formal definition: an arbitrage is a set of trades that costs nothing or less than nothing to set up, can never lose, and has some chance of a gain. Pricing models assume such opportunities disappear almost immediately, because traders who find them buy the cheap side and sell the expensive side until the prices meet.
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Worked example (hypothetical)
Market X offers gold at price P. Market Y bids for the same gold at P + D, where D is a small positive gap.
| Step | Action | Result |
|---|---|---|
| First | Buy on market X at P | Long gold |
| Second | Sell on market Y at P + D, at the same instant | Short gold, position flat |
| Third | Pay costs C (spreads, commissions, transfer, financing) | Net = D − C |
The trade is an arbitrage only if D is larger than C and both legs fill at the quoted prices. If C is equal to or larger than D, there is nothing to gain.
You can use the calculators to see how spread and commission compare with a gap of your own choosing.
Forex arbitrage
Triangular arbitrage compares a cross rate with the rate implied by the pairs that make it up. For example, EUR/USD multiplied by USD/JPY gives an implied EUR/JPY. If the quoted EUR/JPY is different from that by more than the total cost of all the legs, a loop through the currency pairs can return more euros than it started with.
Covered interest arbitrage uses spot rates, forward points and interest rates. Covered interest parity is the no-arbitrage condition that links them.
Why retail traders rarely achieve it
- Speed. Banks and high-frequency firms close real gaps in fractions of a second, often through API trading.
- Costs. Spreads and commissions on each leg usually take more than the whole gap.
- Execution risk. Slippage, requotes or a partial fill on one leg leaves you holding open exposure. The trade is then a directional bet, and with leverage that can lose money fast.
- Stale quotes. A gap shown in a slow price feed often does not exist at the price you can actually trade.
- Contract terms. Many brokers restrict "latency arbitrage" and similar methods in their client agreements. If you trade with Exness, read its current client agreement on the official site to see how it treats such trading.
Where the term appears
- News: "merger arbitrage" (betting that a takeover deal closes) and "statistical arbitrage" (trading on price relationships between assets). Both carry real risk, so they are arbitrage in name only.
- Futures reports: the "basis" or "cash-and-carry" trade between spot and futures prices, which is linked to contango, backwardation and the futures roll.
- Broker documents: clauses on abusive or latency arbitrage in terms of business.
Related terms
Counterparty · Dealer · A-book and B-book · Front running · Fill or kill and IOC · Forward contract · Risk management · Trading glossary
Frequently asked questions
Is arbitrage really risk-free?
Only in theory. In practice, execution, costs and counterparty risk mean most real trades labelled "arbitrage" can lose money.
What is arbitrage trading in simple words?
It means buying where an asset is cheaper and selling where it is dearer at the same time, so the price gap is the profit.
Does forex arbitrage work for retail traders?
Rarely. Real gaps are tiny and short-lived, and spreads, speed limits and broker terms usually remove them before a retail order fills.
Is arbitrage the same as hedging?
No. Hedging reduces the risk of a position you already hold. Arbitrage tries to profit from a mispricing while having no net position.