The chances are good that you have at least a little familiarity with the stock market. Perhaps you have a retirement fund that you look out occasionally. You might even have invested in a long term money market account or other type of cash investment. Or you may have even works with IRAs foreign invested personal money into the stock market. Most people have some kind of interaction with the stock market at least once in their lives. They know enough to know what they don’t know which is a lot, meanwhile there is a smaller group of people that have made it their business to know everything about the stock market. They make their living off of predicting trends buying stocks and bonds at the right time and selling them at the right time to other investors. While many people like to dabble with trading on the stock market, arbitrage investments are something that is primarily done by the people who interact with the stock market on a daily basis.
Arbitrage is a type of quick turnaround investment for day traders. Arbitrage is what happens when there is a pricing discrepancy the stock market. This could be due to any number of different factors but essentially it is when an investor by the stock at a lower price and then simultaneously turns around and resells the same stock at a higher price for a quick profit. These types of price discrepancies happen a lot in the stock market, but they also tend to quickly corrects themselves, so in order to take advantage of them someone has to be paying attention and quickly jump on a bond when they noticed that it is being sold at a lower price in one area. If the stock market were part of a perfect world, there would be no opportunities to take advantage of arbitrage deals, because the market would never allow the same stock to be priced differently in two different areas. As it is, the stock market is fairly good about catching these pricing discrepancies but not often before many people have made money off of them.
When an arbitrage deal is done on a tax exempt bond, the government requires that the investor pay the government back an arbitrage rebate. An arbitrage rebate is like a tax that is paid to the governments on any arbitrage transactions. If someone makes a profit off of the tax-free bond, then they must pay that profit back to the government, especially if they use the profits to invest in a taxable bond. Calculating an arbitrage rebate is a complex process and as best left to the experts. Investors will typically keep records of their trading transactions and then pass those records to their arbitrage compliance specialist to keep track of.
These firms, such as Arbitrage Compliance Specialists are responsible for calculating the rebates and making sure that everything is in compliance with the deals of the investor completes. They also make sure that all of your transactions are in compliance with the current tax code.