Arbitrage-Induced Slippage

Arbitrage-Induced Slippage is the price impact caused by arbitrageurs correcting price discrepancies between different venues. When a price on one exchange drifts from the global market, arbitrageurs buy or sell the asset to close the gap.

This activity moves the price in the local pool, creating slippage for subsequent traders. While essential for market efficiency, excessive arbitrage can lead to liquidity depletion or increased costs for retail users.

Understanding this mechanism is vital for analyzing the health of decentralized exchanges and derivative platforms. It reflects the constant tension between price discovery and user execution costs.