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Finance Dictionary and Glossary of Investment Terms
A financial institution which engages in arbitrage. Such firms look for market inefficiencies and securities which they feel are mispriced, and then undertake trades which allow them to make riskless profits. Arbitrage opportunities are often very difficult to detect, since mispricings can be very small. Further, arbitrage opportunities tend to disappear almost immediately since market forces act to reverse the opportunity. Given these characteristics of arbitrage, many arbitrage houses are equipped with very sophisticated computer software and hardware to help them identify potential opportunities and act on them very quickly. Many arbitrage houses also develop complex software-driven mathematical models to identify mispricings and market inefficiencies.