Pairs Trading

A market-neutral strategy that involves simultaneously buying one security and shorting a correlated one, profiting from the convergence or divergence of their price relationship. Classic pairs include Coca-Cola/Pepsi, Visa/Mastercard, or two oil companies in the same sub-sector. The strategy was pioneered at Morgan Stanley in the 1980s by quantitative researcher Nunzio Tartaglia and remains a staple of statistical arbitrage desks.