Concept
The word arbitrage means making a risk-less profit by entering into two or more transactions of identical or equivalent instruments in two or more markets at the same time. One who engages in this practice is called an arbitrageur.
The simultaneous purchase and sale of something at different prices sounds like a purely hypothetical transaction that shouldn't ever exist. But various flavors of arbitrage or near-arbitrage do exist, offering profits that are attractive compared to the risk borne by the arbitrageur.

The arbitrageur buys in the cash market and simultaneously sells in the futures market getting a profit (Gross return). Arbitrage also exits where the stock futures trading at discounts and the investor previously held the underlying stock (Buy future and sell stock in cash market). ). For calculation of net return, different charges like brokerage, transaction cost, stamp duty, STT (Securities Transaction Tax) etc should be deducted from the gross return.

Overview
Before the NSE came into existence, the price of the same stock varied across exchanges. Therefore, it was easy to make money by buying at one exchange and selling at a higher price on another. But nowadays, with real-time transfer of information, the difference between the prices of the same stock on different exchanges is minuscule. That’s why people play more in derivatives and arbitrage between the price differences in the cash and the futures markets. In the Indian context arbitrage is largely concentrated in stock futures; index arbitrage is not very popular as yet.

In the bull market, investors are willing to pay a slight premium to the underlying cash price in the futures market as they expect the stock to rise in the short term and are willing to pay the premium (discounts do also happen at times of dividend and bearishness in the stocks).

Market Makers: True Arbitrage
Arbitrage is being done mostly by market makers because when the difference do appear, the window of opportunity lasts for only a short time (i.e. seconds or minutes). That’s why they tend to be executed primarily by market makers who can spot these rare opportunities quickly and do the transaction in seconds.

Market makers have several advantages over retail traders:
• Far more trading capital
• Generally more skill
• Up-to-the-second news
• Faster computers
• More complex software
• Access to the dealing desk
• And more

Combined, these factors make it nearly impossible for a retail trader to take advantage of pure arbitrage opportunities. Market makers use complex software that is run on top-of-the-line computers to locate such opportunities constantly. Once found, the differential is typically negligible, and requires a vast amount of capital in order to profit. The retail traders would likely get burned by commission costs. Needless to say, it is almost impossible for retail traders to compete in the risk-free genre of arbitrage.