arbitrage

Think of the aunty who buys tomatoes cheap at the farm gate in Sokoto and sells them at a small profit in a Lagos market, only she does it the same afternoon, with no risk of the price changing before she resells, and she knows exactly what she will make before she even starts. That is the spirit of arbitrage, spotting a gap between two prices for the same thing and closing it fast, before the gap disappears.

In the stock market, arbitrage often happens when a share is listed on two exchanges, or when a stock and its related option or future are priced slightly out of step with each other. A trader buys where it is cheap and sells where it is dear, at almost the same moment, and the profit is the small gap between the two prices, multiplied by however many units they can move.

A Nigerian example makes it real. Suppose a company's shares trade on the Nigerian Exchange and also, through some cross listing arrangement, on a foreign exchange. If the Lagos price briefly works out cheaper once you convert currencies and fees, a sharp trader buys in Lagos and sells abroad, locking in the difference before the two prices realign, which they usually do quickly once other traders notice.

In the United Kingdom, arbitrage shows up often between a company's shares and depositary receipts trading in New York, or between a future on the FTSE 100 and the actual basket of shares it tracks. The mechanics stay the same everywhere, only the tickers and time zones change.

The catch is that true arbitrage windows are tiny and close fast, because plenty of well funded traders with fast computers are hunting the same gaps. For the everyday investor, the lesson is not to chase these tiny cracks yourself, but to understand that this constant hunting is part of why prices across markets tend to stay fair and close to each other.