When you become a trader you will hear very often these words: financial spread betting and arbitrage. In trading market the spread betting company quotes 2 prices for an asset: bid and ask price. These prices are known as spread of the stock. A spread is the difference between the bid and the ask price of a security. So financial spread betting means that investors place a trade, saying that the price of the stock will increase or decrease than the ask price. In UK, financial spread betting is very popular.
The other word, arbitrage, it means simultaneously buying and selling an assert to profit from market inefficiencies or to exploit price difference. Opportunities of arbitrage are when the price of identical financial instruments vary in different markets or through different companies. The asset can be bought low and sold high simultaneously. Professional traders can make an arbitrage transaction and take advantage of these market inefficiencies to gain risk free return.
To understand better we’re going to take an example. Let’s assume that Vodafone is trading at $115.01 on the New York Stock Exchange (NYSE) and the equivalent of $115.48 on the London Stock Exchange (LSE). The investor making an arbitrage transaction would buy the stock from NYSE at $115.01 and simultaneously sell the stock on the LSE at $115.48. Consequently the trade has a 47 cents profit per share.
In arbitrage transactions the trader profits from the difference in bid-offer spread between the difference from the 2 spread betting companies. So when spread offered by a company is below the bottom end of another spread, the arbitrage appears. The acting on arbitrage opportunities must be done quickly because you have to avoid execution, counter party and liquidity risk.