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Arbitrageur

Reviewed by Anjaneyulu | Updated on Oct 05, 2020

Catalogue

Introduction

An arbitrator is a type of investor trying to capitalise on market inefficiencies. These inefficiencies may be related to any aspect of the market, be it price, dividends, or regulations. Price is the most common method of arbitration.

The arbitrator leverage market inefficiencies and makes simultaneous trades that balance each other to gain risk-free profits.

For example, an arbitrator will pursue price differences between stocks listed on more than one exchange. He purchases undervalued shares on one exchange while short selling the same amount of overvalued shares on another exchange, thus gaining risk-free gains as the prices converge on the two exchanges.

Understanding Arbitrators

Typically, arbitrators are very experienced investors, since arbitration opportunities are hard to find and require relatively fast trading. We do need to be risk-oriented, in-depth, and relaxed. This is because most arbitrage plays entail significant risk. These are also bets about the future business course.

Arbitrators play an important role in capital market activities, as their attempts to exploit demand inefficiencies hold rates more reliable than they would otherwise be.

Example

Mr Ivan F. Boesky was an example of an Intelligence Arbitrator. During the 1980s, he was considered a master arbitrator in takeovers. He minted money, for instance, by buying stocks of Gulf oil and Getty oil during that time before their purchases by California Standard and Texaco, respectively. In each trade, he's estimated to have made between $50 million and $100 million.

The emergence of cryptocurrencies gave arbitrageurs yet another chance. As bitcoin's price hit new heights, many opportunities presented themselves to exploit price differences between various exchanges that operate around the world.

For example, at cryptocurrency exchanges located in South Korea, Bitcoin traded at a premium compared to those located in the United States. The price gap, also known as the Kimchi Premium, was mainly due to the high demand in these regions for the crypto. Crypto traders made the most of arbitrating the price gap in real-time between the two places.

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