What Is the Concept of 'Toxic Flow' in the Context of Liquidity Provision? ▴ Learn

What Is the Concept of ‘Toxic Flow’ in the Context of Liquidity Provision?

'Toxic flow' refers to order flow (trades) that consistently results in losses for the liquidity provider (LP). This typically comes from sophisticated, low-latency traders who can identify and exploit stale prices faster than the LP can adjust their quotes.

LPs use mechanisms like 'last look' to identify and avoid trading against this toxic flow to maintain profitability.

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