Arbitrage refers to trading to make riskless profit with no investments.
Consider this example of arbitrage. Stock of ABC trades on both NYSE and NASDAQ. On NYSE it trades at 15$ and on NASDAQ at 17$. This mismatch in the price of the same stock provides the trader with an opportunity to make a riskless profit. The trader will buy the stock on the NYSE at 15$ and simultaneously sell the stock on the NASDAQ at 17$. The trader makes an instant profit of 2$ without any investment/risk. Note that the above transactions are riskless since the trader enters the 2 positions simultaneously.
Pricing mismatches are very rare and even if there are any, the mismatch would be very less to provide any profit considering brokerage fees and transaction costs.
In today’s financial markets where information flows quickly and where so many traders are on the lookout for mispricing, arbitrage opportunities are virtually non existent and even if one exists the pricing mismatch is wiped out immediately. And hence they say, there is nothing called as ‘free money’ !!
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