When an investor takes advantage of price differences across exchanges, what is this process called?

The process of taking advantage of price differences across exchanges is known as arbitrage. This strategy involves buying an asset at a lower price in one market and simultaneously selling it at a higher price in another market. The key here is that the investor exploits inefficiencies in the market that cause the same asset to be priced differently at different venues. This creates an opportunity for profit without risk, assuming the transactions occur nearly simultaneously.

Arbitrage plays a critical role in maintaining market efficiency, as it helps equalize prices across different exchanges by increasing demand in one market and increasing supply in another. This balancing act is essential to ensure that no significant price discrepancies linger over time.

In contrast, practices like front running or insider trading involve unethical or potentially illegal behaviors where traders exploit confidential or prior information for gain, which is distinctly different from the principles of arbitrage. Therefore, identifying arbitrage is foundational in understanding market dynamics and the strategies employed by investors aiming to mitigate risks while seeking profit.