It’s time for some Weekend Wisdom 🔮
Not all trading flow is created equal. Some flow is considered "toxic" and it can break markets if left unchecked.
Let’s unpack what toxic flow is, how it’s identified, and why it matters for market makers and traders alike ⬇️
Toxic flow refers to trades that consistently make money at the expense of liquidity providers.
It often comes from highly informed traders or bots exploiting inefficiencies.
When market makers can't price risk fast enough, they take losses, and liquidity disappears.
In traditional finance, firms use complex models to detect and avoid toxic flow.
In crypto, where anyone can access the order book or mempool, toxic flow is harder to manage. MEV bots, latency arbitrage, and oracle lag can all contribute to toxic conditions.
Too much toxic flow drives market makers away, widens spreads, and raises costs for everyone else.
To manage it, platforms may adjust fees, offer selective liquidity, or build protections into smart contracts and matching engines.
Understanding toxic flow helps explain why liquidity isn’t always deep, even in high-volume markets.
It also shows how transparency and speed in data delivery shape market quality.
Who should bear the cost of toxicity: the trader, the platform, or the market maker?
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