What is the Difference Between Market Arbitrage and Risk Arbitrage?

Arbitrage or “market arbitrage” is the practice of simultaneous buying and selling in two or more different markets to exploit a price differential between them. The profit for the arbitrageur is the difference between the market prices. For example, an arbitrageur might short-sell a stock at the higher price and buy at the lower price, taking profit in the spread between the two. Arbitrageurs are thought by many to serve an important role in keeping markets efficient as their operations will cause prices in different markets to meet.

While market arbitrage is a risk-free strategy (at least in theory), risk arbitrage as the name implies, does involve risk to the arbitrageur. Pairs trading and liquidation arbitrage are two examples of risk arbitrage. A third example, merger arbitrage, occurs when an acquiring company makes a tender offer at greater than market price for all of the outstanding shares of a company. In this case, the arbitrageur might buy shares of the company rumored to be acquired or short-sell stock in the acquiring company.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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