“Arbitrage” trading is simply the trading of securities when the opportunity exists during the trading day to take advantage of differences in value between the markets the trades are made
within. Arbitrage trading takes place all day long on most days that the markets are active.
Arbitrage traders will buy and sell the same or closely related securities at the same time. They take advantage of the price or value differences in two separate markets such as the NYSE and the CME
futures. In perfect securities markets there would never be any arbitrage traders or trades. Since the securities markets are not perfect when news or other information moves a security or index they can and often
do become unequal in price temporally. If the markets were perfect all identical securities would trade at the same value or price on each market they were traded on.
One of the most popular Arbitrage trading opportunities is played with the S&P futures and the S&P 500 stocks. During most trading days these two will develop disparity in the pricing between
the two of them. This happens when the price of the stocks which are mostly traded on the NYSE and NASDAQ markets either get ahead or behind the S&P Futures which are traded in the CME market.
Lets say the stocks get ahead of the futures in price. Arbitrage traders will sell the stock and buy the futures. They end up with the same or or closely related investment but have just made money by
taking the difference in the prices from the two separate markets.
Another example of arbitrage trading. Lets say there is a Company that releases good news in a press release. The stock starts to trade higher on the NASDAQ, and there are call options available for
the stock on the AMEX which have not had any or little action or volume. If you jump on the options before they catch up with the climbing stocks price you can often make money by selling the stock and buying the
options at the same time. Remember the price disparities that offer the opportunities will not last long, seconds is the norm.