The concept of Arbitrage in sports markets: Are they bets you can’t lose?
In economics, finance and sports, arbitrage is the concept of taking advantage of a price difference between several markets: striking a mix of matching deals which capitalize upon the imbalance, the profit being the differences relating to the market prices.
When used by academics, an arbitrage is actually a transaction which involves no negative cash flow at any probabilistic or temporal state as well as a positive cashflow in a minimum of one state; basically, it’s the potential for a risk-free gain at zero cost. In effect free money from deals where zero risk existed.
In financial markets this is known as ‘Arbitrage’. In gambling markets it is known as Matched Betting.
In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may well refer to anticipated profit, though losses may arise, and in practice, there are always risks in arbitrage, some minor (which include change of prices decreasing profit margins), some major (along the lines of devaluation of the currency or derivative).
In academic use, an arbitrage involves benefiting from differences in cost of a single asset or identical cash-flows; in common use, it is usually used to make reference to differences between similar assets (relative value or convergence trades), such as merger arbitrage.
People who take part in arbitrage are known as arbitrageurs say for example a bank or brokerage firm. The word is principally related to trading in financial instruments, including bonds, shares, derivatives, products and currencies.
Specific sport arbitrage has additionally recently become achievable due to the use of world wide web bookmakers giving widely diverging odds on sports making situations where it is easy to place bets that cannot lose.
Although this involves bookmakers it is far from gambling as there is no risk on the initial stake which can not be lost.
Arbitrage just isn’t simply the act of purchasing an item in one market and selling it in another for a better price at some later time. The dealings must take place simultaneously to prevent exposure to market risk, or even the risk that prices may change in one market before both trades are finished.
In simple terms, this is generally only possible with securities and financial products which can be traded electronically, and even then, when each leg of the trade is accomplished the values sold in the market could have moved.
Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is called ‘execution risk’ or more specifically ‘leg risk’.
“True” arbitrage requires that there be no market risk included.
