Deliberately underproviding liquidity to drive up arbitrage is an interesting idea I've not come across before. On low fee hive that might work, on fee chains the fee would surely eat the tiny rewards.
Not too sure how this benefits the DAO unless it has LP in loads of small pools? And community would not benefit at all due to worse trading rates.
RE: SPS Governance Proposal - Reduce SPS:Swap.Hive LP Incentives