Toxic Flow in Forex Business

Everything You Ought To Know Regarding Toxic FX Flow

What Exactly Is Meant By Toxic FX Flow?

It is a fact that any particular flow which might appear to be toxic for any particular market maker might end up being rather beneficial for another person out there. At present, technology has become the center of the FX businesses, and it has a significant role to play when it comes to controlling the rules and regulations of the game to a great extent. The term “Toxic FX Flow” has directly connected on most occasions with the technology, which is actually behind this liquidity factor.

However, the question here might arise regarding what exactly is the toxic flow in FX? Unfortunately, it is not possible to answer this question simply. In fact, the answer demands lots of things to take into consideration. Different types of forms can be taken by toxic flow right now. It might be in the form of trading on some unacceptable market prices, trading in the very same direction across more than one trading venue simultaneously at the very same time, or even trading on the inadequacies of any FX technology which is not sophisticated by any means. In general, one can view Toxic flow as any predatory or unwelcome stuff. Still, here we would like to mention that although something might appear to be rather toxic to any particular market maker, this does not imply that it will be the same for any other person out there. In fact, it might be rather beneficial for him in the long run.

Similar types of problems will be encountered by all those traders in the margin FX space who attempt to implement similar techniques that have been employed by them in the futures and the stock markets in recent times. The reason for this is the fact that there is an absence of any backup in the form of genuine items, and also, there isn’t any central exchange whatsoever. Under normal circumstances, when some person is winning, the other will be losing out; however, irrespective of this, one can expect that all of the participants in the market will be playing by the regulations to maintain proper law and also avoid any undesirable incident and chaos out there.

However, the unfortunate thing here is that you will come across individuals now and then who like to pose challenges for the system or would like to take advantage of its weaknesses and drawbacks. In the subsequent paragraphs, we have provided a few examples of Toxic FX Flow that you should consider going through.

1. “Picking-Off” The Feed Or Latency Arbitrage

This can be considered a sort of trading at present designed specifically to capture any deviation of the price. This is meant to involve placing trades on the application of technology, which is known to be slow or latent to the market. After that, covering all these positions at a particular profit once the provider can catch up to the genuine market.

Instead of trading on the marketplace, it is actually trading on somebody else’s incompetent technology and is a fantastic instance of predatory flow.

There is no secret that lots of market makers function at present without any sophisticated pricing engine and, because of this, it might become slow when it comes to updating the prices. This will leave ample room for every type of arbitrage out there.

2. Impact Made With The Market On Multiple Orders

A market maker can stream liquidity to more than one price venue simultaneously, and this might, therefore, be vulnerable to getting “hit” at the identical price by the same customer, at the identical time, on more than one platform.

For instance, any financial institution might agree to offer “top-of-book” liquidity of as many as EURUSD 10 million to 5 platforms, presuming that all those venues will stream their prices to a bigger and diverse customer base. Somebody (being aware that the price depicted here is only valid for EUR 10 million) might use this to their advantage and strike all of the 5 platforms in EUR 10 million simultaneously. Therefore, rather than presuming a EUR 10 million position, the financial institution will be offered EUR 50 million at a top-of-book rate, which was actually meant only for the EUR 10 million. Here, it has been possible for the customer to create at a particular price that had been “off-market” for one EUR 50 million trade.

3. New Trading

It will be possible to make the financial institutions crazy by sending more than 1 or bigger-than-usual trades once the markets move on any particular news release or due to a global event that took place unexpectedly. At times, this might be possible by figuring out the precise timing of the price movement.

As many as 32 to 100 price updates are sent by the banks every second every currency pair, the top-notch trading systems will be possible to identify the market’s direction within only the initial few updates. They can also place the trades accordingly. Financial institutions that have to face this kind of situation might not have adequate time for covering themselves in the marketplace before prices begin to move in their direction. As a result, they will fight against this kind of trading technique by either modifying or discontinuing their pricing to the customer, particularly before any significant news release.

Is it possible for the primary liquidity market makers (financial institutions) to reverse trades? Will they request the liquidity distributors to put an end to the trading? Obviously, they can. How frequently is this performed? The answer, in this case, will be “very seldom.”

These above-mentioned facts are simply a few instances of what can be regarded by many individuals as toxic flow. There is no doubt that lots of innovative and interesting cases are arriving on the scene every day, and it will be really intriguing to see what is in store for us shortly.



Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on:

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