Drawbacks of Arbitrage
1. Transaction Cost: There is a high transaction cost linked to buying and selling assets that people usually ignore. Further, taxes are also applied to the income generated through the selling of the asset. Both of these elements lower the profit or sometimes result in loss.
2. Less Opportunity: In real life, there are very less opportunities for arbitrating because of the enhanced technology and awareness of the loopholes. To gain arbitrage opportunities, a trader should be highly active and expert in making transactions.
3. Market Risk: The market is never stable, it changes frequently. Arbitrage involves taking positions in different markets simultaneously. Changes in market conditions can expose arbitrageurs to market risk, leading to potential losses.
4. Capital Requirement: To take the benefit of the price difference of the markets, traders require a significant amount of capital. This can limit the accessibility of arbitrage strategies to smaller investors or firms with limited capital.
5. Technology: An arbitrageur should be highly active and must be aware of the current situation of the market. Mostly, arbitrageurs rely on technology for information and quick execution of the trade. Lack of technology or any glitch or system failure can hinder the execution process and the arbitrageur might lose the opportunity.
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