The Shadow Arena is located within the Shadowlands and connected to the Factory by an underground tunnel. The arena is used by the Shadow Lord to put his prisoners up against his evil creatures, most of the time killing them. They mostly fight against vicious Vraals, the Shadow Lord's personal fighting beast.
In the Deltora Quest anime the Shadow Arena is shown to have columns that circle the inside of it, which is where the audience (mostly Grey Guards and Ols) is seated and watches the brutal fights.
After taking control of the Rithmeregames, the Shadow Lord used the games as a way to find new combatants for the Shadow Arena. All finalists and semi finalists were captured after the games and carted to the Shadowlands to fight Vraal in the arena.
Lief, Barda, and Jasmine were captured by two Grey Guard and overhead them talking about the Shadow Arena.