How Do Transaction Costs Limit Arbitrage Opportunities?

Transaction costs directly reduce the profitability of arbitrage. Arbitrage exploits small price differences, and costs like trading fees, network gas fees, and withdrawal fees can easily erase these narrow profit margins.

If the total cost of executing the trades across different markets is greater than the price discrepancy, the arbitrage opportunity becomes unprofitable and is therefore not pursued. This creates a threshold where only price gaps large enough to cover all associated costs are viable.