What is Arbitrage?
Arbitrage captures risk-light profit from mispricing between related instruments, often requiring speed and low costs.
Formula
Simple Arbitrage Example: Stock XYZ trades at: - NYSE: $100.00 - NASDAQ: $100.05 Arbitrage Trade: 1. Buy 10,000 shares on NYSE at $100.00 = $1,000,000 2. Sell 10,000 shares on NASDAQ at $100.05 = $1,000,500 3. Net profit: $500 (risk-free) Reality: This opportunity lasts milliseconds and requires massive capital for meaningful profit.
Indian market context (NSE)
Reference levels: Nifty 50 at 24,300, Reliance Industries at ₹1,300, Bank Nifty futures at 55,000 (lot size 30). Examples below show how Arbitrage shows up on Indian index, equity, and futures books — update to live quotes in your journal.
Nifty 50 perspective
Arbitrage on Nifty (24,300): backtest includes 9:15 liquidity and expiry-day behaviour; edge on index may vanish outside 10:00–14:30 window.
Reliance Industries perspective
Arbitrage on Reliance (₹1,300): liquidity is deep but event gaps dominate — strategy rules need explicit earnings blackout weeks.
Bank Nifty futures perspective
Arbitrage on Bank Nifty futures (55,000): high beta suits shorter holds; overnight arbitrage must state NRML risk and gap plan in writing.
How to validate
- Validate Arbitrage only after costs — gross win rate can hide negative expectancy.
- Use walk-forward windows (e.g. last 60 / prior 60 trades) for stability.
- Retire or refactor the tag if Arbitrage expectancy turns negative with 50+ trades.
- Ensure no overlapping tags duplicate the same trades.
How to track in TradeLyser
- Define Arbitrage in Strategy Board with entry/exit/skip criteria.
- Enforce single-tag discipline — no secondary discretionary entries.
- Review expectancy, win rate, and avg R monthly on the tag only.
- Archive tag version when rules change; do not blend old and new trades.
Best practices
- One playbook page per Arbitrage strategy with non-negotiable rules.
- Paper trade rule changes for two weeks before live size.
- Track costs explicitly on high-frequency Arbitrage variants.
- Compare versioned tags after each rule amendment.
Common pitfalls
- Adding discretionary trades under the Arbitrage tag.
- Scaling up after one lucky week of Arbitrage results.
- Ignoring brokerage drag on high-frequency variants.
- Retiring a tag without exporting final statistics.
How to use this in TradeLyser
Log basis or spread at entry and exit. Net after fees must be positive over 20+ arbs to continue.
Related terms
Algorithmic trading automates entries, exits, and sizing via code or platform rules, reducing discretion at execution.
A futures contract obligates parties to transact the underlying at settlement per NSE rules, with daily mark-to-market and margin.
Liquidity describes depth and ease of entering/exiting at stable prices. Nifty top names differ sharply from illiquid small caps.
Pairs trading goes long one instrument and short another, betting on convergence of a historically related spread.
FAQ
What is an example of arbitrage?
A stock trades at $100 on NYSE and $100.50 on London exchange. Arbitrageurs buy on NYSE and sell on London, pocketing $0.50 per share risk-free. This price difference typically exists for only milliseconds.
Why is arbitrage called risk-free?
Pure arbitrage is risk-free because you buy and sell the same asset simultaneously at different prices. There's no market risk—you're not betting on direction. However, execution risk, capital requirements, and timing can add risk in practice.
Can retail traders do arbitrage?
True arbitrage is extremely difficult for retail traders. Opportunities last milliseconds and require expensive technology. However, retail traders can do 'quasi-arbitrage' like statistical arbitrage or cash-futures arbitrage with longer-lasting inefficiencies.
What is the difference between arbitrage and speculation?
Arbitrage profits from price differences with minimal directional risk—simultaneously buying and selling related instruments. Speculation profits from anticipated price movements with full directional risk—betting the price will go up or down.
Why do arbitrage opportunities exist?
Price differences arise from time zones, different exchange mechanisms, slow information flow, illiquidity in some markets, and temporary supply/demand imbalances. Arbitrageurs quickly eliminate these differences, making markets more efficient.
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