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More to the Story

If you are a skeptical investor, you are probably waiting for the other shoe to drop. After all, investing would be easy if arbitrage opportunities abounded. In this section, you will consider why it is so difficult for investors to find and take advantage of arbitrage opportunities.

Pure Arbitrage

The nature of pure arbitrage—two identical assets that are priced differently—makes it likely that it will be short-lived. In other words, in a market in which investors are on the look-out for riskless profits, it is very likely that small pricing differences will be exploited quickly and, in the process, disappear. Consequently, the first two requirements for success at pure arbitrage are access to real-time prices and instantaneous execution. It is also very likely that the pricing differences in pure arbitrage will be very small, often a fraction of a percent.


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