(redirected from Arbi)
Also found in: Dictionary, Thesaurus, Financial, Acronyms, Encyclopedia.


The simultaneous purchase in one market and sale in another of a security or commodity in hope of making a profit on price differences in the different markets.

In its simplest form, arbitrage is "buying low and selling high." In this sense, any trader who buys something in one market—whether it is a commodity like grain, financial Securities such as stock in a company, or a currency such as the Japanese yen—and sells it in another market at a higher price is engaged in arbitrage. That trader is called an arbitrageur. In economic theory, arbitrage is a necessary activity in any market, helping to reduce price disparities between different markets and to increase a market's liquidity (ability to buy and sell).

Arbitrage can be divided into the categories of riskless and risk. As an example of riskless arbitrage, imagine that the price of Microsoft Corporation common stock on the Pacific Coast Stock Exchange is less than the price of the same stock on the New York Stock Exchange. A trader who buys Microsoft stock at the lower price on the Pacific Coast exchange and simultaneously sells it for a higher price on the New York exchange is engaging in an essentially riskless transaction. Aided by the speed of modern communications, the buying and selling occur at virtually the same time. This type of exchange occurs daily in the currency market, where a trader may buy French francs at a lower price in London and sell them at a higher price in Singapore.

Much arbitrage falls into the risk category. This type of arbitrage is not always completed with a sale at a higher price; it involves a risk that the price of the item being traded will fall before the trader can sell it. Risk Arbitrage came into prominence during the 1980s, when investors began to take advantage of a business atmosphere encompassing a large number of company Mergers and Acquisitions. In a merger or acquisition, one company buys or takes over another company. When the management of the targeted company does not want to be acquired by a particular investor or group of investors, the merger is called a hostile takeover. Quite often, the aggressors in such takeovers are smaller in terms of assets than their targets. A hostile takeover is usually initiated when someone believes that the stock of a particular company is lower than its potential value, whether because of poor management or because of a lack of information about the true value of that company.

One way that hostile takeovers are initiated is through a device called the cash tender offer. The party attempting to initiate the takeover announces that it will pay cash for the target company's stock at a price well above the current market value. At this point, risk arbitrageurs become involved in the game. They buy stock from shareholders in the target company, then attempt to sell that stock at the higher price to the party attempting the takeover. If the takeover succeeds and the arbitrageurs receive a higher price for their stock, they profit; if the takeover fails or the arbitrageurs receive a lower price for their stock, they lose. Gauging the risk of a takeover's failure is therefore crucial to an arbitrageur's success.

An arbitrageur who purchases securities on the basis of inside information—that is, information about a pending takeover that is not available to the general public—violates the Securities Exchange Act of 1934 (§ 10[b], as amended, 15 U.S.C.A. § 78j[b]). However, purchasing securities on the basis of rumors about an imminent takeover is not illegal.

Ivan F. Boesky was one example of a risk arbitrageur who was found guilty of engaging in insider trading. Boesky profited enormously from the many corporate takeovers of the mid-1980s. By 1985, he had become famous in financial circles and had published a book, Merger Mania: Arbitrage: Wall Street's Best Kept Money-Making Secret, that extolled the opportunities in risk arbitrage and the benefits the practice gave to the market. In 1986, only one year later, Boesky admitted that he had illegally traded on insider information obtained from Drexel Burnham Lambert, the securities firm that arranged the financing of many of the takeovers of the era. In return for a reduced sentence of three years in prison, Boesky agreed to pay a $100 million penalty and to cooperate with the government's continuing investigation. Boesky named Drexel employee Michael R. Milken as a member of the insider trading network. In 1990, Boesky was released from prison after serving two years.

Further readings

Boesky, Ivan. 1985. Merger Mania. New York: Holt, Rinehart.

"Complex Plan of Finance Successfully Navigates Arbitrage Rules." 2003. Tax Management Memorandum 44 (February 10): 60–61.

Steuerle, Gene. 2002. "Defining Tax Shelters and Tax Arbitrage." Tax Notes 95 (May 20): 1249–50.

Stokeld, Fred. 2001. "IRS on the Prowl for Illegal Arbitrage. Tax Notes 92 (September 10): 1396–98.


Bonds "Michael R. Milken" (sidebar); Corporations; Securities; Securities and Exchange Commission.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
One of the biggest problems, she said, is that cases of ARBI are going undiagnosed due to lack of expertise in the NHS and because of the large number of different symptoms present in patients including memory loss, depression, loss of balance, tingling, numbness and pain in the hands, feet and legs.
D25105_2 CURTAIN UP: Riza Arbi (left) and Sandeep Daley behind the scenes of one of the toy theatres.
Arbi added, however, that even though the House could censure or demote Wahid, it should not, under the presidential system, move to oust him.
The courses includes: Al-lisan Ul Arabi(Basic Arabic Course), Arbi bol-chal, Lught-ul-Quran, French Online, Technical Courses, Certificate in Librarianship, Short-term educational programs, Agricultural Courses, Technical and Vocational Training Courses, Industrial Training program (Duration one month), Certificate Course in Literacy and Non-formal education (Only for Rawalpindi/Islamabad) and Advanced Industrial Training in Automation and Process Control(for Engineers, Technologists and Diploma holders).
The military identified two of the men as Alshaber Arbi, 18, a Grade 11 student at Kalingalan Caluang National High School who was seen in the video sporting a hair bun, and Gerry Isnajil, a teacher in the same school who was seen in the video wearing a maroon cap and carrying a backpack.
(TAP special correspondent Semia Boukhatem) - General Manager of Leoni Tunisia Mohamed Arbi Rouissi announced the forthcoming creation of a mega-project in Tunisia which will help create about 5,000 new jobs for youths, including academics and technicians.
The University has also introduced short-term courses of Al-lisan ul Arabi, Arbi bol-chal, Lughat-ul-Quran and French online, Major portion of curriculum of these courses have been updated to equip the students with latest knowledge, techniques and methods particularly in the field of agriculture.
Qari Zubair, Haider Ali, Qari Zahir Gul, Atiqur Rehman, Taj Muhammad, Aqsan Mehmood, Fateh Muhammad, Sher Alam, Faiz Muhammad, Muhammad Arbi, Muhammad Ghouri, Tahir Mehmood, Fazal Ghafar, Saeeduz Zaman and Sakhi Mehmood among 16 are to be hanged.
Zagreb responded with El Arbi Soudani heading wide.
Liste des convoquees : Sekouane, Bouheni, Bekhedda, Arbi Aouda (Afak Relizane), Boutchiche, Khelifouche, Laifa, Afak, Bara (AS Alger centre), Sedrati, Merouche, Chaib Adda (FC Constantine), Taknint, Sadou (Surete nationale), Bekouche, Mazouz (JF Khroub), Hadjar (USF Bejaia), Miraoui (Claix Football), Benlazar (FC Toulouse), Labiod et Benyoub (AS Muret).