Arbitrageurs (sometimes spelt arbitragers), or simply referred to as “Arbs” are a group of investors who seek financial gain by profiting from the convergence of the values of two (or more) assets. In other words, an arbitrage investment strategy. For example, one may buy a security at a low price, and, within a few seconds, re-sell it to a willing buyer at a higher price.
Arbitrageurs are an important and specialized group of investors in the marketplace. They help provide liquidity and keep markets (reasonably) efficient by arbitraging away price discrepancies as they occur. Arbitrageurs can keep prices relatively stable as markets attempt to resist their attempts at price exploitation.
Strategies employed by the arbs can vary widely and can involve all products from across the financial spectrum. Among the more commonly known strategies are convertible bond arbitrage and statistical arbitrage. They often use computer programs because their transactions can be complex and occur in rapid succession.
Ironically, many do not consider merger arbitrage as a member of this investment class. The spread is there for a reason, such as the uncertainty in the deal closing probability. In this case, it is up to the trader to decide if the merger spread warrants the risk. This is contrasted in pure arbitrage where the arbitrageur exploits a mispricing in identical or reasonably similar assets.
Who are the Arbitrageurs?
Institutions are usually the biggest arbitrageurs. With access to larger reserves, they are able to trade large volumes of shares and make huge profits even when the spread is small. Sometimes a fraction of a penny. The transaction fees and rebate structures have made this a viable proposition for larger institutions whilst smaller private traders would see their profits eliminated.
Arbitrageurs are typically experienced traders who have the know how to locate and identify arbitrage opportunities and are able to execute the strategy quickly and efficiently. They also need to be skilled at analyzing the risk involved with the trade.
Ivan Boesky is still perhaps one of the most famous arbitrageurs in history despite his subsequent fall from grace. He was considered a skilled merger arbitrageur during the 1980s and made huge profits by buying stocks in prospective takeover targets before the deals were announced.
