Arbitrage is a trading strategy where a trader takes advantage of price differences for the same asset in different markets. The idea is simple — buy at a lower price in one market and sell at a higher price in another at the same time.

This allows the trader to earn a small, low-risk profit from the price gap.

Arbitrage can happen in stocks, currencies, commodities, or even between cash and futures markets. It helps keep prices aligned across markets, improving overall market efficiency.

A trader notices that Reliance Industries shares are trading at ₹2,450 on the NSE and ₹2,455 on the BSE. The trader buys shares on the NSE and sells them on the BSE at the same time, earning ₹5 per share before costs.

Similar opportunities also exist between the cash and futures market (cash–futures arbitrage) or between Indian Depository Receipts and their underlying foreign shares.

In India, such opportunities usually last only for a few seconds because institutional investors and algorithmic tradersquickly act on them, bringing prices back in line.

• 1800s – Early Arbitrage in Gold Markets
Price differences between cities like London and New York allowed traders to buy gold in one market and sell in another. Slow communication and transport made such opportunities possible.

• Late 19th Century – Telegraph Reduces Arbitrage Gaps
The introduction of the telegraph improved communication speed, reducing price differences between markets and making arbitrage opportunities smaller and shorter-lived.

• Modern Era – Algorithmic Arbitrage
With electronic trading and high-speed systems, arbitrage is now executed in milliseconds. This has made markets more efficient, with very limited and short-lived price differences.