Is Arbitrage Illegal?

Understanding Arbitrage

Arbitrage - This is a new concept. This allows traders to exploit price discrepancies in the same underlying on different markets. Arbitrage trading is a low-risk strategy, which is why it's so popular. Arbitrage trading is legal? Arbitrage trading is legal in some countries. This is an exciting concept that we will discuss in this article. We will also explain how arbitrage could be used as a trading strategy for diversifying your portfolio.

What is Arbitrage?

Arbitrage is a trading strategy that allows traders to profit from the difference in prices of assets on different markets. Arbitrage is the act of buying and selling the same security on different exchanges, or benefiting from the difference in the spot price of a security and future contracts. Arbitrage is a way to improve market efficiency. Arbitrageurs also help improve liquidity in the market.

Market efficiency refers to the level of market competency. It is the availability of all information about security price. Market efficiency is when all relevant price information is captured in the security prices and no oversold securities are available.

Arbitrageurs contribute to market efficiency. How?

Arbitrageurs try to profit from price differences between different markets. If the market is efficient, there should be no price differences between markets. Arbitrageurs profit from mispricing which is a clear violation to the law of one-price. Arbitrageurs can bring price discrepancies to the forefront and let other traders profit from them, by adjusting the market to reflect the new price.

Let's dive deeper into this concept.

Arbitrage can occur in any market for any asset, stocks, commodities, or forex. Arbitrageurs can also influence market liquidity by engaging in arbitraging. An arbitrageur might buy shares of a company at lower prices in market A, and then sell them at market B for a higher price. They act as market intermediaries, adding liquidity to the market.

Arbitrage is generally considered to be low-risk or risk-free in most cases. However, this is not always true. Arbitraging can increase your risk exposure by increasing the chance of missing an arbitraging opportunity. You may have found an arbitrage opportunity but you don't react quickly enough to take advantage of it.

Who are the Common Players?

Arbitrage can be done by anyone, even retail traders. The market is dominated by institutional players and mutual fund asset management companies. The software they use to identify arbitraging opportunities quickly and execute the transactions fast is what makes them so much more profitable than retail investors.

Retail investors can use mutual funds arbitraging funds to benefit from arbitraging, even if they lack the expertise.

Is Arbitrage Even Legal in The Indian Market?

Inter-exchange arbitraging is one concept. Indian security prices are different, but only by a small margin, which creates arbitraging opportunities for traders. However, intraday traders are prohibited from arbitraging under current market policies. Arbitrage is not an intraday trading strategy. To reverse your position and get squared off at the same exchange, you would need to do so before the day ends. If you take delivery of securities, you may be able to open arbitraging opportunities for yourself. It also allows you to trade risk-free. Stock delivery can be done in one exchange, and delivery in another.

Traders use several arbitraging strategies. Cash-futures arbitraging is one such strategy.

Let's say you bought shares of company XYZ at Rs 190 apiece from the stock market and then sold a futures agreement for the exact shares at Rs 215 on the futures market. This creates a risk-free arbitrating possibility.

The key takeaways

• Arbitrage is caused by price differences in the same asset on different markets
• It's not an intraday trade strategy and inter-exchange arbitraging in India isn't legal for intraday.
• You can arbitrage between the two exchanges, however, if you take security delivery or participate cash-future arbitration
• - Do not confuse the trading price of a security with an arbitraging opportunity

Conclusion

Arbitraging, as it is commonly known, allows traders to profit from differences in asset prices across different markets. It is not an intraday trading strategy. There are many arbitraging trading techniques that traders use, but the price difference disappears as more traders attempt to capture it. Arbitrage trading is legal in India, so let me answer your question. If you take stock delivery, yes its legal.

Arbitrage is encouraged in many markets because it causes price discrepancies, and allows the market to apply the law of one.