What does arbitrage mean?
Arbitrage is the practice of profiting from differences in the price of the same asset across different markets. A trader who notices that gold sells more cheaply on one exchange than another can buy in the cheaper market and sell in the dearer one simultaneously, capturing the gap as profit. In its strict financial sense, such a trade is considered essentially risk-free, since both sides are executed at once. The term has broadened beyond finance to describe any exploitation of a discrepancy — in tax rules, regulations, interest rates, or even information — to secure an advantage. Arbitrage plays a valuable economic role: by exploiting price gaps, arbitrageurs push prices back into alignment, making markets more efficient. The word comes from French and shares its root with 'arbitrate', which resolves disputes rather than trading on them. It is a technical but widely used term in economics, investing, and business journalism.
nounThe simultaneous buying and selling of an asset in different markets to profit from a difference in its price. More broadly, the exploitation of price differences or discrepancies for risk-free gain.
- The practice of simultaneously buying and selling an asset in different markets to profit from a price difference.
- By extension, any exploitation of a discrepancy (in prices, rates, rules, or information) to gain an advantage.
"Traders exploited a brief arbitrage opportunity when the stock traded at different prices on the London and New York exchanges."
"A hedge fund spotted that gold was cheaper in Shanghai than in New York and executed an arbitrage trade within seconds."
"Companies practise tax arbitrage by structuring operations across jurisdictions with differing tax rates."
Rarely used; arbitrage usually appears as a singular mass noun describing the practice rather than countable instances.
"The fund reported several profitable arbitrages during the quarter."
The word 'arbitrage' and 'arbitrate' come from the same root — one settles disputes, the other profits from them.
Reviewed by Deb Chak, Editor. AI-assisted content curated by RJS Tech Solutions LLP.
Etymology of arbitrage
Arbitrage entered English from French in the late 17th century, originally referring to arbitration — the resolution of disputes between merchants or states. Its modern financial sense, profiting from price differences between markets, developed later as the word's meaning shifted from settling disagreements to exploiting market discrepancies. It derives ultimately from Latin 'arbitrari', meaning to judge or give opinion, the same root that gives us 'arbitrate', 'arbiter', and 'arbitrary'.
Related word forms
How arbitrage is actually used
Arbitrage is a technical term from finance but has entered general business and economics vocabulary. In classical theory it implies a theoretically risk-free profit; in everyday use it is often applied loosely to any exploitation of a discrepancy. The person who carries it out is called an arbitrageur or arbitrager. Pronunciation varies: some speakers rhyme the final syllable with 'age' (/ˈɑːrbɪtrɪdʒ/), though /ˈɑːrbɪtrɑːʒ/ is standard.
Easily confused with arbitrage
Arbitration is the settlement of a dispute by an impartial third party, whereas arbitrage is profiting from price differences of the same asset across markets.