Arbitrage means buying an asset in one market at a lower price and selling it in another market at a higher price to earn a riskless profit.
Arbitrage helps improve market efficiency because it removes pricing differences between markets.
Example:
Suppose the same stock is trading at ₹100 on Market A and ₹105 on Market B.
An arbitrageur can buy the stock at ₹100 in Market A and sell it at ₹105 in Market B.
Profit per share:
₹105 – ₹100 = ₹5
If the arbitrageur trades 1,000 shares, total profit will be:
₹5 × 1,000 = ₹5,000
As more traders do this, demand increases in Market A and selling pressure increases in Market B. Eventually, the prices move closer, and the price difference disappears.
So, arbitrage helps correct mispricing and makes markets more efficient.
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