An arbitrageur is a trader or firm that tries to profit from relative pricing gaps while managing execution, funding, and convergence risk.
An arbitrageur is a trader, fund, dealer, or firm that attempts to profit from pricing differences between related assets, contracts, venues, currencies, or cash flows. The role is not simply finding a sure thing; it involves building offsetting positions and managing the risks that can prevent prices from converging as expected.
Arbitrageurs can help align prices across markets, but they also face practical limits: capital, borrow availability, margin, settlement, speed, liquidity, regulation, and model error.
| Activity | Why it matters |
|---|---|
| Identify related prices | Finds instruments that should be connected by contract, economics, or model. |
| Build offsetting positions | Reduces some directional exposure while retaining spread or basis exposure. |
| Finance and margin the trade | Determines whether the trade can survive before convergence. |
| Monitor hedge ratios | Keeps the position aligned as prices, volatility, and contract terms change. |
| Manage exits | Converts theoretical edge into realized profit or controlled loss. |
| Type | Common strategy | Main risk |
|---|---|---|
| Cross-market arbitrageur | Buys and sells equivalent instruments across venues. | Latency, fees, settlement, and partial fills. |
| Merger Arbitrage trader | Trades deal spread between target price and consideration. | Deal break, antitrust, financing, and timing risk. |
| Convertible Arbitrage trader | Buys convertible security and hedges equity or credit exposure. | Volatility, credit, borrow, and hedge-model risk. |
| Statistical Arbitrage trader | Trades modeled mean reversion or factor-neutral spreads. | Model decay, crowding, costs, and regime shifts. |
| Evidence | Why it matters |
|---|---|
| Strategy mandate | Distinguishes market making, hedging, statistical arbitrage, and event-driven trading. |
| Position and hedge report | Shows whether the book is actually hedged or only described as hedged. |
| Borrow and financing terms | Short positions, leverage, and carry cost can dominate results. |
| Liquidity and slippage | Determines whether the edge can be captured at trade size. |
| Risk limits and stop rules | Shows how much convergence delay the book can tolerate. |
| Post-trade attribution | Separates spread capture from market beta, factor exposure, or luck. |