minukrishna said:
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!