Query about arbitrage?

minukrishna · #1 15th August 2004, 04:57 PM

I would like to know how arbitrage is being done?How are the shares settled between different exchanges.How is it legally valid!
Traderji pls clear my doubt.

Traderji · #2 15th August 2004, 07:43 PM

Quote:

Originally Posted by minukrishna

I would like to know how arbitrage is being done?How are the shares settled between different exchanges.How is it legally valid!
Traderji pls clear my doubt.

What is Arbitrage?
The simultaneous purchase and selling of a security in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces.

Arbritrage is legally allowed. In fact arbitrage is responsible for a large part of the daily volumes on the NSE & BSE exchanges.

What mainly takes place in India is called Market Arbitrage

Market Arbitrage involves purchasing and selling the same security at the same time in different markets (BSE & NSE) to take advantage of a price difference between the two separate markets. A market arbitrageur would short sell the higher priced stock and buy the lower priced one. The profit is the spread between the two assets.

This is how it works:

You have two individuals, one sits in front of a BSE terminal and another in front of a NSE terminal.

The moment there is any price difference in the two exchanges in a particular stocks, they buy the stock in the exchange that has a lower price and sell the stock in the exchange that has a higher price.

They then square up their positions during the course of the day whenever they have a favourable price.

This is how arbitrage works on the BSE & NSE!

minukrishna · #3 16th August 2004, 05:02 PM

Quote:

Originally Posted by Traderji

What is Arbitrage?
The simultaneous purchase and selling of a security in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces.

Arbritrage is legally allowed. In fact arbitrage is responsible for a large part of the daily volumes on the NSE & BSE exchanges.

What mainly takes place in India is called Market Arbitrage

Market Arbitrage involves purchasing and selling the same security at the same time in different markets (BSE & NSE) to take advantage of a price difference between the two separate markets. A market arbitrageur would short sell the higher priced stock and buy the lower priced one. The profit is the spread between the two assets.

This is how it works:

You have two individuals, one sits in front of a BSE terminal and another in front of a NSE terminal.

The moment there is any price difference in the two exchanges in a particular stocks, they buy the stock in the exchange that has a lower price and sell the stock in the exchange that has a higher price.

They then square up their positions during the course of the day whenever they have a favourable price.

This is how arbitrage works on the BSE & NSE!

Thank you traderji . But i have still a doubt.That means if i sell glaxo in bse @ rs.609 in bse and i buy the same @ rs 603 in nse does the transcation end there or should i again square up the positions in bse say at a price lower than 609 and in nse a price higher than 603.
I would be very much satisfied if you provide an simulated example!

Thank you in advance.

Traderji · #4 16th August 2004, 06:21 PM

You have to again square up your position on both the exchanges on the same day.

So in your case you have to buy glaxo at a lower price on the bse and sell glaxo at a higher price on the nse.

balaj78 · #5 30th June 2005, 08:34 AM

Quote:

Originally Posted by Traderji

You have to again square up your position on both the exchanges on the same day.

So in your case you have to buy glaxo at a lower price on the bse and sell glaxo at a higher price on the nse.

Traderji ,
I have a dou't in arbitrage. As an indivudual can do arbitrage trading or he should have to register with the broker for doing arbitrage.
For eg
satyam Trading in Nse Rs 610
satyam Trading in Bse Rs 600
In this case iam buying in Bse for Rs 600 and selling in Nse for 610.
Now iam squaring the position in both the exchanges as
Selling Satyam in Bse for 601and Buying in Nse for rs 509
Here what profit would i get Bse(Buy 600 - Sell 601) = Profit 1
and Nse(Sell 610 - Buy 609)= Profit 1
Actually i got in the both exchages Rs 2 as profit. where as the arbitrage differnce between the two exchages were Rs 10.
In this situation where arbitrage comes and hw to make profit by doing arbitage. Experts please explain me .

ivanboesky · #6 30th June 2005, 12:28 PM

You made only Rs. 2 because the prices at the two exchanges had still not converged when you reversed your initial positions. If the prices on both exchanges had converged you would have made the full Rs. 10.

balaj78 · #7 30th June 2005, 04:00 PM

Dear traderj
Iam Bala from chennai . Iam new to commodities . I reffered some sites about Trading Gold futures. Still it is something confusing. In geojitwebsite they had given

"Arbitragers

Arbitragers are those who benefit from arbitrage i.e. taking advantage of price differences arising between the spot market and futures market.

Example : December spot price is Rs.5875 and January futures price is Rs.5950. Arvind buys in spot and sells in futures to gain an annualised return of 15.31%."

In this case how to trade commodities in cash price and sell in the futures. if the futures price is higher than the spot price .can we sell in cash . Anybody trading in commodities please explain me how to trade with minimum less risk with limited profits.

ivanboesky · #8 1st July 2005, 01:37 PM

Will be difficult for a small investor to arbitrage in the commodities market. Dont know if you will be able to buy the physical gold at a price good enough to justify the arbitrage position. Theoretically, it is possible to arbitrage in the commodities market.
Much easier to arbitrage in the equity derivatives market.

subratabera · #9 4th July 2005, 06:47 PM

Dear Traderji, can you please define the term arbitrage in more detailed way. Because the above definition is not so clear. If I have to square my posotions on both markets then what is the benefit of arbitration? Please make it more clear. Thankyou.

Traderji · #10 5th July 2005, 09:27 AM

Here is a simple explanation:

Suppose you own 600 shares of Satyam. One trading day you notice that Satyam is trading at 505.00 on the BSE and 500.00 on the NSE. You sell your 600 shares on the BSE at 505.00 and simultaneously buy back the 600 shares on the NSE at 500.00.

You profit in this case is 600*5.00 = 3000.00 less brokerages if any.

Generally in the west, large institutions have automated trading programs that scan different markets across the globe to take advantage of arbritrage opportunities as small as a fraction of a point. Because of their volumes and almost no brokerage these institutions make profits out of these.

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