Arbitrage applies to financial as well as gambling markets, and involves the simultaneous buying and/or selling in different markets to take advantage of different prices in the same market. In short, the possibility for arbitrage only exists due to market inefficiencies.
From a gambling point of view, this is all about finding glitches or price differentials in the same market at the same time, and being able to place bets in such a way that you cannot lose.
Such opportunities are rare and usually arise due to either bookmaker error or, more commonly, differing perceptions of value in different markets. Bookmakers have been using arbitrage for many years themselves, but the opportunities for successful arbitrage by members of the public in betting markets have been greatly improved by the advent of the betting exchanges since the turn of the century.
As an example, let’s imagine you had perceived Leicester City to be reasonably good longshot value for the Premier League title for the 2015-16 season. Before the start of the season, the major high street bookmaker chains were offering The Foxes at 5,000-1, in some cases, to win the title. Of course, this wasn’t perceived to be much of a risk judging from the Premier League’s previous 23 winners, but everyone knows what went on to happen.
Now, let’s assume that Leicester’s seven points from their first three games and the generally excellent way they were playing shortened the odds on the exchanges to 4,000-1. But let’s also say the bookies, who were keen to earn some more fee money, or due to a simple oversight, still had The Foxes at 5,000-1.
In this example there is, of course, a potential “free” £1,000 to make from each £1 staked with the bookies but layed back on the exchanges. Obviously, Leicester had to actually win the title for the bet to come off, but such a scenario would be a good example of arbitrage. It is gambling in such a way that you cannot possibly lose via two different markets on the same event.
Arbitrage shouldn’t be confused with hedging your bets, which is all about reducing your risk of losses by placing bets on the other side of the market, usually to lessen the potential for big losses, or to guarantee a profit (albeit a smaller one) as an event progresses.