What Is the Relationship between Slippage Tolerance and Arbitrageurs’ Profit Margin?

Slippage tolerance is the maximum acceptable price change a trader is willing to endure. Arbitrageurs, however, view slippage as a key part of their profit calculation.

They must execute a trade that is large enough to move the AMM's price to the external market price, but the slippage on that trade is a cost that reduces their profit margin. A lower slippage tolerance by retail traders may allow arbitrageurs to profit from smaller price discrepancies, as the retail trade leaves the pool further out of balance, increasing the arbitrage opportunity.