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So, basically I want to debate and find out the real reason behind being flag by ECNs and venues as "toxic". How to avoid being flagged? What kind of strategies are toxic and why?

Below is an article found by a brokerage firm... so the opinion in that article couldn't be that objective.

Article about toxix FX flow


Any thoughts?

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  • $\begingroup$ No comments...? $\endgroup$
    – Ariel Silahian
    Apr 13, 2016 at 3:43
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    $\begingroup$ Hi, you link an article but you don't provide any definition or explanation what your question is all about. I am too lazy to read the article without any clue what the topic is. Maybe you want to add some details. $\endgroup$
    – Richi Wa
    May 23, 2016 at 7:24

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The primary way ECNs determine if a liquidity taker's flow is 'toxic' or not is by looking at aftermath charts. The aftermath chart shows the average mark-to-market profit of trades done by the liquidity taker as a function of either time or number of top-of-book updates (optionally broken down by currency pair). The trade profit is usually viewed from the liquidity provider's perspective, and so the aftermath chart is typically equal to half the average bid/ask spread at the inception of the trade, corresponding to the y-intercept of the aftermath chart.

Now, the time it takes for the aftermath curve to decay to zero represents the average amount of time a liquidity provider has to monetize the spread earned at inception after trading with the given liquidity taker (by matching the trade with another liquidity taker, for example). If this amount of time is relatively short (typ. a few seconds), then the flow is harder to monetize. Such flow is considered 'sharp', and very sharp flow is considered 'toxic'.

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Usually it's aggressiveness of your orders + short term alpha. While it's equities not FX, I think you may find something interesting in the recent Barclays LX darkpool lawsuit documents.

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