International arbitrage revolves around taking advantages of price differences between goods and securities in different countries. While this is a common practice among many types of investors, arbitrage separates itself because the buying and selling happen nearly simultaneously. When the broker is purchasing an item in one market, they are selling that same item in a different market. International arbitrage is widely seen as a little to no-risk investment, as the initial purchase doesn’t take place unless the profit is available right then.
This investment method relies on multiple markets in vastly different locations. Even though most investment markets are tied together by computer, that doesn’t stop small discrepancies from popping up in the system. High turnover goods, like monetary investments, will often have small surges in one area, but not in others. This surge will translate through the system, but it will often create a small bubble in the original market. This bubble will cause the good to have a higher or lower value than elsewhere.
International arbitrage follows a fairly simple process, but what it lacks in complexity it makes up for in timing. In a typical arbitrage situation, the investor is monitoring one good on multiple markets. When they see that a specific stock, commodity or monetary bond is selling at a different rate in one market, they purchase it at the lower price. The investor then turns to the market where it is selling higher and sells it. The difference in the two markets is pure profit.
Since international arbitrage relies on the buying and selling at nearly the same time, this process has increased as computers and technology allow for instant communication. When an investor sees the market imbalance, they need to act immediately before it closes. This requires a nearly instant purchase and sale, something that was impossible before the communication systems became global.
While international arbitrage seems like a no-fail type of investing, there is a small element of risk. The entire system centers on the speed of communication between the buyer and seller. If any part of the communication chain falters or lags, then the seller may not capitalize on the proper price. Since market imbalances are often very short-lived, even a few seconds could disrupt the sale.
This is compounded by the effect the investor has on his own market. When the investor purchases the good with the lower value, this automatically begins to raise the price of the purchased good. This alteration begins to move through the system, changing the prices as the investor attempts to sell. In order to control the sale of the good, the investor needs to stay ahead of his own influence.