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In an arbitrage, an investor makes a series of transactions to take advantage of pricing differences in the market and earn risk-free profits. A large number of investors look for arbitrage opportunities and conduct arbitrages, so the pricing differences usually last only for a very short time. An investor needs to spot pricing differences and make the transactions quickly to conduct a successful arbitrage. Arbitrage software automates the process of detecting price differences, allowing the investor to quickly take advantage of the discrepancies.
An arbitrage opportunity exists when there are two assets with identical cash flows but different market prices. An investor can then buy the cheaper asset and sell it at the more expensive price. As investors take advantage of the price differences, the price of the cheaper asset increases and the price of the more expensive asset decreases so that the prices eventually converge and no more arbitrage opportunity exists. Many investors actively look for arbitrage opportunities because they are risk-free, so this pricing correction takes little time. An investor has to spot the price difference quickly and make the transactions simultaneously to conduct an arbitrage.
Arbitrage software often shows the combination of assets for arbitrage within seconds of the price differences arising. With the large number of investors using arbitrage software, this capability results in arbitrage opportunities only persisting for a few seconds at a time. The market prices of the assets correct themselves and the price differences disappear.
An arbitrage often involves a very small difference in price, so that commission fees could absorb all the profits and erase the benefits of arbitrage. Arbitrage software often has smaller commissions because the investor conducts much of the trading himself. Using such software therefore increases the percentage of profits from arbitrages.
Arbitrage software can work with various types of assets, including stocks, derivatives such as options, and futures and foreign currencies. It often uses sounds and visual alerts to let an investor know when there is an arbitrage opportunity. If the assets involved trade in different currencies, the arbitrage software can often convert them into one currency for easier analysis.
Some suppliers offer sports arbitrage software, but unlike arbitrages with other assets, sports arbitrage often constitutes gambling. It involves taking the best odds available on sporting events so that, regardless of the outcome, the investor earns a profit. Many such schemes never generate the promised high returns and some such companies simply disappear after collecting various fees.