Arbitrage Law and Legal Definition

Arbitrage is the simultaneous purchase and sale of substantially identical investments, such as stocks, commodities, contracts, or insurance in order to profit from a price difference. Arbitrage practices on behlaf of customers are authorized for any member of a national securities exchange. However, the Securities Exchange Act prohibits directors, officers, and shareholders to profit from arbitrage transactions on short-swing speculation in corporate securities in certain instances.

Arbitrage exploits a price difference between different markets on identical or substantially similar items. The profit gained is the difference between the market prices. For instance, when an item is bought at a factory outlet and sold for a higer price at an online auction website, the profit made may be said to accrue through the imbalance in prices between the two markets.