Term: ARBITRAGE

Simultaneous trading in assets, currency or bills of exchange in different international markets, to take advantage of the different rates of return ruling in each. For example, Anglo American shares are traded on both the London Stock Exchange (LSE) and the JSE. If, after taking into account the pound/rand exchange rate there is a material difference between the price of Anglos on the JSE and the LSE then an arbitrageur will buy the shares on one market and sell them on the other until the difference it eliminated or becomes too small to make such arbitrage transactions profitable. These days, arbitrage is done by program trading where very fast computers located close to the different markets execute thousands of arbitrage transactions automatically. The effect of this is to keep the prices of the same security very close on different markets after allowing for exchange rate differences.

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