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Arbitrage is the exploitation for profit of a gap in the prices of a certain asset in two markets or more.
Simple arbitrage operation consists of buying the asset at a market where the price is cheaper and selling in another market at a higher price.
More complex arbitrage activities may include buying and selling assets in a large number of markets, with one transaction offsetting the other and leaving a profit for the Arbitrageur.
The academic definition of arbitrage requires that the operation would be profitable in each of the possible scenarios.
More common practice of arbitrage is a probability arbitrage, which means that the action expectancy gap is positive, even though a possible loosing scenario may occur.
The existence of an arbitrage gap between markets suggests not only for their inefficiency but also to high transaction costs, such as conversion and trading fees which reduce the profitability of arbitrage transactions.
On the other hand, the very act of taking advantage of arbitrage gaps, causing its closure and making the market more efficient.
In practice, operations to find arbitrage gaps are carried out by computers, and the gaps are closing very fast.
High Competition among dealers forces Arbitrageurs to sit close to the geographical center of commerce (The stock exchange), to short the data delivery time to minimum.