Price Differentials represent the observable variance in the valuation of an identical asset across distinct trading venues or geographical markets at a given point in time. These disparities indicate temporary market inefficiencies where the same security or digital asset trades at different prices. Such differences create opportunities for specific trading strategies.
Mechanism
These differences typically arise from asynchronous information flow, varying liquidity levels, divergent regulatory environments, or transaction costs between markets. The imbalance in supply and demand across these venues contributes to the temporary price divergence. Order book depth and trading volumes also influence the magnitude of these differentials.
Methodology
Trading algorithms and arbitrageurs actively exploit these discrepancies through rapid, simultaneous buying on the lower-priced market and selling on the higher-priced market. The objective is to capture risk-free profit before market forces, driven by these very arbitrage activities, equalize prices. This methodology contributes to market efficiency by correcting price misalignments.
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