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What Is the Concept of ‘Market Efficiency’ in Relation to Arbitrage?

Efficient markets eliminate profit from price differences, a condition that arbitrage actively seeks and simultaneously destroys.
Greeks.Live23.11.25

What Is the Concept of ‘Market Efficiency’ in Relation to Arbitrage?

Market efficiency suggests that asset prices fully reflect all available information. In a perfectly efficient market, arbitrage ▴ the practice of making risk-free profit from price discrepancies ▴ should not exist.

Arbitrageurs exploit inefficiencies, such as price differences for the same asset on different exchanges. Their actions of buying low and selling high help to correct these discrepancies, pushing the market back towards efficiency.

Therefore, the existence of arbitrage opportunities is a sign of market inefficiency.

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