What Is Slippage and How Does It Affect Arbitrage Profitability?

Slippage is the difference between the expected price of a trade and the price at which the trade is executed. High slippage, often due to low liquidity or a large trade size, reduces the profit margin for arbitrageurs.

If the potential profit from arbitrage is less than the combined cost of slippage and gas fees, the arbitrage incentive disappears, and the peg-restoration mechanism stalls.