How Does the Concept of “Toxic Order Flow” Relate to HFT Market-Making Strategies?

Toxic order flow refers to orders placed by traders who are better informed than the market maker. When a market maker (often an HFT firm) trades with an informed party, they are subject to "adverse selection," leading to a loss.

To mitigate this, HFT market makers use complex algorithms to identify and avoid toxic flow, often by widening their spreads or rapidly pulling quotes, which can increase slippage for the uninformed flow they reject.