Arbitrage is a trading strategy that involves simultaneously buying and selling an asset in different markets to profit from price discrepancies. The arbitrageur takes advantage of the difference between prices in two or more markets, earning a risk-free profit.
For example, if a stock is trading at $100 on one exchange and $102 on another, an arbitrageur could buy on the cheaper exchange and immediately sell on the more expensive one, pocketing the $2 difference.
In practice, pure arbitrage opportunities are rare and short-lived because market forces quickly correct price discrepancies. Modern technology and high-frequency trading have made arbitrage opportunities even harder to exploit. However, the concept of arbitrage plays an important role in keeping markets efficient.