Arbitrage is simply the practice of benefiting from the price discrepancy between two markets. Merchants have done this since the beginning of time, buying products from places where they’re cheap and selling them on in other areas where they’re expensive.

In trading it works much the same way, if the exchange value of an asset is cheaper in one market than another, traders will buy in the more affordable market and sell in the more expensive one. Arbitrage is a natural function which helps to fix market inefficiencies.

This is because when enough traders take advantage of this practice, the result is to bring the prices of the two markets back in line with each other.
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