Arbitrage is one of the most creative ways traders can benefit from the markets. It allows traders to take advantage of price differences across different markets. Compared to other trading strategies, arbitrage trading is considered low–risk. This is one of the reasons why it is popular. But – Is Arbitrage legal in India? 

Before we answer that question, let’s understand the meaning of arbitrage trading. 

What Is Arbitrage Trading?

Arbitrage trading is the buying and selling of the same asset across different markets. Here, you are basically purchasing and selling the same asset, but from different exchanges. The gains are from the price difference between the two prices. 

Let’s take an example to understand arbitrage trading better –

Say a trader buys the stock of company XYZ for $10 a share on the NYSE. The trader is looking to benefit from arbitrage opportunities in the markets and make some quick returns. 

The same company is listed on the BSE for a price of ₹760 rupees per share. Assuming that $1 is worth ₹80, one XYZ share would cost you ₹800, whereas it is trading at ₹760 on the BSE. The gains in price difference would be = ₹800 -₹760 = ₹40 per share. 

Our trader, who has access to both markets, can simply buy the stock on the NSE for ₹760 per share and sell it on the NYSE for ₹800 per share, making a profit of ₹40 per share in the transaction. 

Essential Conditions For Arbitrage

For arbitrage trading techniques to work, here are two of the necessary conditions –

1. Asset Price Difference

The main factor for successfully using arbitrage trading is the price difference across markets. The same security has to trade at different prices in different markets for arbitrage to work. 

2. Window Of Opportunity

The trader who is using arbitrage has to buy and sell the same security in different markets simultaneously. This is mainly because arbitrage has a very small window of opportunity.

Traders with quick software have an edge because the earlier the transaction, the higher the chances of making profits. 

Is Arbitrage Legal In India?

For trading in listed equities, India has two stock exchanges – BSE and NSE. The existence of two exchanges has created an opportunity called inter-exchange arbitraging.

Here, you’re could take advantage of the slightest difference in the price of the same security listed on multiple exchanges. But, SEBI has banned this form of trading in different exchanges. 

SEBI does not allow buying and selling of shares on different exchanges on the same day. This means you cannot buy shares on NSE, and try to sell them on BSE intraday.

What you can do is sell your shares that are already held in your Demat account but it is not considered intraday trading.

For example, a trader can buy shares of company XYZ on the BSE, and in the next market session, he can sell the same shares on the NSE. This is a form of arbitrage but it is not intraday trading. 

At present, arbitrage trading can be done if you already hold stocks in your Demat account. Assume that you already hold shares of Tata Motors and it is trading at ₹400 on NSE and ₹402 on BSE.

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Since you already hold the shares, you can sell them on BSE for ₹402 and buy them on NSE for ₹400. However, this defeats the purpose as timing is another crucial aspect and the next market session may already take eradicate the price difference.

Arbitrage Players In The Market 

This trading strategy is open to all traders, including retail (except in India). Yet, the big players such as asset management companies and institutional investors.

Their access to huge capital and advanced trading software gives them the edge over retail traders.

Also Read: 10 Best YouTube Channels To Learn Share Market in India!

In Closing

Arbitrage is a great opportunity for traders who prefer low risk. But this form of trading comes with its own unique conditions such as a small window of opportunity and transactional costs.

One of the well-known examples of arbitrage is the case of controversial FTX founder Sam Bankman-Fried. SBF used the advantage of arbitrage in the case of cryptocurrencies to amass a fortune over time. 

That’s all for the article Is Arbitrage Legal In India, We hope you enjoyed reading it. Happy Investing!

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