# Arbitrage > Arbitrage is profiting from price differences for the same thing in different places. Learn the main types, why opportunities vanish fast and the hidden risks. Source: https://learn.tradelabsai.com/markets/arbitrage/ Track: Markets and Instruments · Level: Beginner · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Arbitrage", https://learn.tradelabsai.com/markets/arbitrage/ Arbitrage is buying something in one place and simultaneously selling the same thing, or its equivalent, somewhere else at a higher price, locking in the difference. In its pure form, it is a profit with no exposure to price moves, because the buy and sell offset each other. In reality, pure arbitrage is rare and fleeting, and most strategies called arbitrage carry some risk. ## A simple example **Example: Exchange arbitrage** Bitcoin trades at $60,000 on Exchange A and $60,150 on Exchange B at the same moment. A trader with funds on both buys 1 BTC on A and sells 1 BTC on B, earning $150 minus fees. Repeated by many traders, this buying on A and selling on B pushes the prices together until the gap is smaller than the costs of doing the trade. That last point is the key to arbitrage: it is self correcting. Every trader who exploits a gap helps close it. This is one of the main forces that keeps prices for the same asset aligned across markets. See [Price Discovery](https://learn.tradelabsai.com/market-structure/price-discovery/). ## Types of arbitrage | Type | What it exploits | Example | |---|---|---| | Spatial or exchange | Same asset, different venues | A stock or coin priced differently on two exchanges | | Cash and carry | Futures priced above spot plus carrying costs | Buy spot, sell the future, deliver at expiry. See [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/) | | Triangular (FX) | Inconsistent cross rates between three currencies | EUR/USD, USD/JPY and EUR/JPY out of line | | ETF arbitrage | ETF price differs from the value of its holdings | Creation and redemption by authorised participants | | Funding and basis (crypto) | Perpetual futures funding or futures premium | Long spot, short perpetual to collect funding. See [Funding and Basis Arbitrage](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/) | | Merger arbitrage | Target trades below the agreed takeover price | Buy the target, sometimes short the acquirer | | Statistical arbitrage | Historically related prices drift apart | Trade the gap expecting it to close. See [Statistical Arbitrage](https://learn.tradelabsai.com/strategies/statistical-arbitrage/) | Only the first few are close to risk free. Merger and statistical arbitrage are really bets that a relationship will hold. ## Why pure arbitrage is so hard to find - **Speed:** professional firms with fast connections and automated systems close obvious gaps in milliseconds. - **Costs:** spreads, commissions, transfer fees and taxes often exceed the gap. - **Capital:** you usually need funds on both sides of the trade at the same time. - **Size:** gaps are often small and only available for small quantities before prices adjust. ## The hidden risks in "risk free" trades 1. **Execution risk.** You fill one side but not the other, leaving you with an unhedged position. 2. **Transfer risk.** Moving assets between venues takes time, during which prices move or withdrawals are paused. 3. **Counterparty risk.** An exchange or broker on one side fails or freezes funds. 4. **Deal risk.** In merger arbitrage, the deal can collapse and the target's price can fall sharply. 5. **Convergence risk.** Prices that "should" come together can drift further apart before they do, forcing a trader with leverage to close at a loss. The collapse of Long-Term Capital Management in 1998 is the famous example. See [The Collapse of LTCM](https://learn.tradelabsai.com/history/the-collapse-of-ltcm/). **Watch out: Small edges plus leverage** Many arbitrage strategies earn small returns per trade, so traders use leverage to make them worthwhile. That turns a low risk trade into a fragile one if prices move against it for longer than expected. ## Why arbitrage matters to every trader Even if you never run an arbitrage strategy, arbitrageurs shape the prices you see. They keep ETF prices near their holdings, futures near fair value, the same coin priced similarly across major exchanges and currency crosses consistent. When those links break, often during market stress, it is a sign of something unusual: frozen withdrawals, a liquidity crunch or a broken market. ## Frequently asked questions ### Is arbitrage legal? Yes. Arbitrage is legal and helps keep markets efficient, though specific practices such as front running client orders are not arbitrage and are illegal. ### Can retail traders do arbitrage? Occasionally, especially in less efficient markets like smaller crypto exchanges or prediction markets, but costs, transfer delays and competition make reliable profits difficult. ### Is arbitrage really risk free? Pure arbitrage is close to risk free in theory, but in practice execution, transfer, counterparty and convergence risks mean most real arbitrage involves some risk. ## Sources - Wikipedia, [Arbitrage](https://en.wikipedia.org/wiki/Arbitrage) ## Continue learning - Next lesson: [Mark-to-Market](https://learn.tradelabsai.com/markets/mark-to-market/) - Previous lesson: [Hedging](https://learn.tradelabsai.com/markets/hedging/) - Related: [Hedging](https://learn.tradelabsai.com/markets/hedging/): Hedging means taking a position that offsets the risk of another. Learn how hedges work with options, futures and correlated assets, their costs and limits. - Related: [Arbitrage Strategies](https://learn.tradelabsai.com/strategies/arbitrage-strategies/): Arbitrage strategies try to profit from price gaps between the same or linked assets. Learn the main types, worked examples and why arbitrage is rarely riskless. - Related: [Statistical Arbitrage](https://learn.tradelabsai.com/strategies/statistical-arbitrage/): Statistical arbitrage trades many small, mean reverting mispricings across a portfolio of securities. Learn how stat arb works, its models, costs and risks. - Related: [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/): Cash and carry arbitrage buys an asset and sells its futures when futures are rich versus carry costs. Learn the formula, gold, index and crypto examples, and risks. - Related: [Funding and Basis Arbitrage](https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/): Funding and basis arbitrage buys crypto spot and shorts perps or futures to earn the premium while staying neutral. Learn the mechanics, returns and risks. - Related: [Price Discovery](https://learn.tradelabsai.com/market-structure/price-discovery/): Price discovery is how markets combine buyers' and sellers' information into a price. Learn how it works, where it happens and what helps or harms it.