Tether price is 80cents. Person trades bitcoin for tether. Person redeems tether for $1, profiting 20cents. Tether issues more (fraudulent, not backed) currency. Repeat.
Which markets confuse tethers with USD? They are clearly two different assets. The former is a private currency, issued by a company and redeemable in USD, while the latter is the USD that the former IOU is denominated in.
I see how this would affect the price of bitcoins in tethers, but not how it would affect the price of bitcoins in USD (unless the market, as a whole, conflates the two).
Also, where do these alleged arbitrageurs redeem their tethers? As I understand it, the corporation that issues tethers was cut off from doing international wire transfers, thus rendering tethers irredeemable.