The act of purchasing and selling the same asset in different markets nearly simultaneously takes advantage of the different prices and increases profits.
Understanding the Term
Markets, such as stock and cryptocurrency exchanges, are by nature inefficient due to a multitude of factors: differing degrees of access to information among market participants, different trading tools and techniques, transaction costs, human psychology, and more. These inefficiencies often result in a difference between the prices of the same asset — for example, a cryptocurrency — in different markets.
Arbitrage traders take advantage of these price discrepancies by buying an asset in the market where it is cheaper and then selling it in the market where it is priced higher, almost immediately.
For example, if one Bitcoin (BTC) is selling for USD 40,000 on Exchange ABC and USD 40,015 on Exchange XYZ, then an arbitrageur can generate a profit of USD 15 for every BTC they arbitrage between these exchanges.
To arbitrage is to exploit the price difference of an asset or security between two markets for profit.