Arbitrage

Trader's Glossary · Contracts and markets

Definition. Exploiting price differences in the same or a closely related instrument across different markets. Thanks to arbitrage, the prices of related contracts, such as MYM and YM, move almost identically.

How it works

When one instrument's price momentarily diverges from a related one, algorithms buy the cheaper and sell the more expensive until the difference disappears. This happens in fractions of a second.

Example

MYM and YM are contracts on the same index in different sizes. Their prices stay practically equal, and a large part of the Dow futures liquidity sits in YM.

What to watch out for

For an individual trader, arbitrage is practically out of reach. Its importance is that it explains the links between instruments.

See also

MYM, Basis (fair value), Liquidity.

More in Hetman Capital Club

You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.