The third tier of Grinder requires you to play 500 matches. This can be done with a combination of arcade and multiplayer matches. You should have a good head start on this after completing arcade mode with every character. You do NOT have to win the matches for it to count towards the challenge, so you can let the CPU beat you over and over while you do something else and occasionally hit to continue.
Use the following settings to make these matches as fast as possible:
Difficulty: 8 stars
Damage: 8 stars
Match Speed: 8 stars
Max Rounds: 1