The most common and most likely answer to this crossword clue is the 5 plus 7 letter word SPACE INVADER
I've seen this crossword clue in The Guardian
S
P
A
C
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V
A
D
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R
More clues leading to the result SPACE INVADER
Buddy explains!
The straight part
We know that "Character from arcade game" is the straight/definition part of the clue. The straight part is often a synonym or definition, in this case character from arcade game = space invader.The cryptic/wordplay part
In cryptic crossword there's often an wordplay/cryptic part as well.This part involves a more complex hint, such as an anagram, homophone, hidden word, etc.
Sadly, We don't have an explanation for this specific crossword clue yet.