Why Is a Highly Liquid Market Essential for Effective Arbitrage?

High liquidity is essential because it ensures that arbitrageurs can execute large-volume trades quickly and with minimal price impact (low slippage). Arbitrage opportunities are often fleeting, and a liquid market allows for immediate execution at the desired price.

Low liquidity, conversely, leads to higher slippage and transaction costs, making the arbitrage opportunity uneconomical or impossible to capture.