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Launched: Toxicity of Trading Strategies

We continue to add statistics of interest to our diagnostic kit. This time we’ve added the toxicity of a DARWIN’s and its investors’ flow.

We show the new statistics in the Capacity (Cp) study. At the moment they don’t affect the Cp score.

What is flow toxicity

Toxicity attempts to measure how easy it is for a liquidity provider to act as counterparty to a flow. We’ll see in a moment why it’s a very relevant parameter.

There are agents in the market who make the market by providing liquidity to the order book. They do this in the hope of obtaining a profit with the least possible risk. They take the liquidity from one side of the market and hope to get rid of it as soon as possible by demand on the other side. If they’re able to cross an order instantly, they earn the spread. But what happens if the market moves while they undo their position? Sometimes they’ll win and sometimes they’ll lose. On average, they’ll make a profit (or loss) depending on their ability to determine which orders to take.

The toxicity of a flow will then depend on:

  1. The volume of the order in relation to the volume that moves in the opposite direction in a period of time. The larger the volume of the order, the longer it will take for the provider to remove the risk as it won’t find enough demand in time on the other side.
  2. The direction the price takes in the moments after they receive the order. If the price moves in favor of the DARWIN, it means that the provider goes into a loss. If on average there is always a bias in favour of the DARWIN, they’ll consider the flow toxic.
  3. The type of supplier you have on the other side. In particular their risk appetite. That’s what will define how long they are willing to keep a trade and volume open on a given asset.

How we measure toxicity

From the perspective of the liquidity providers, the size of the order is not a problem, because they can manage it:

  • limiting the largest size they’re willing to put on the order book, and
  • defining the greatest exposure they wish to have in a given asset and flow (broker).

Each provider will define a limit according to their risk appetite. So, it’s a parameter that is in their control.

But, the direction of the market is something they cannot manage a priori. So they must protect themselves from taking orders from a flow that turns positive fast. They must also make sure not to keep orders from such flows longer than their risk tolerance allows. In summary, they must protect themselves from closing their trades at a loss.

Also, a very large order - considering the existing flow in that asset at that moment - will make the price move in favor of the order. The different providers will withdraw until there is interest on the other side of the market with which to protect themselves.

So, the toxicity of a DARWIN will depend on how the price moves in the moments immediately after it sends an order. Our statistics show this up to 5 minutes, to include many of the risk appetites of providers.

If the price of the underlying moves in favour of the strategy in a representative sample of orders, the flow will be toxic. Otherwise it will not. The sooner and the more the price and volume of the order moves in its favour, the more toxic it will be.

Why it matters to know the toxicity of the flow

Case 1

If a DARWIN is very toxic, we can assure that it won’t be able to manage more volume than estimated by the Capacity attribute. These DARWINs can cause problems of divergence even with low investment volume. Low meaning lower than the largest volume defined by the Capacity attribute. A DARWIN being toxic without having much volume can be an indicator that the provider is selling its signal elsewhere. Or that it’s an EA. We may not be seeing all the volume that the DARWIN is actually handling. It can also be an indicator of strategy exhaustion, because many other traders are attacking the same inefficiency, especially if it’s a strategy that seeks few pips on average per trade (less than 10 pips).

Case 2

A DARWIN with a high divergence but no toxic flow is suffering from divergence for a specific reason. This reason is not properly fractionating its operation. The market would most likely be able to absorb more volume. The trader needs to introduce the volume gradually into the market (at least 10 second of difference).

Darwinex Toxicity Tool

We wanted to make a tool that not only defines whether the strategy is toxic or not. We wanted it to help DARWIN managers to increase their capacity if necessary.

For each DARWIN, we take the last 200 opening and the last 200 closing orders. We present two graphs with each of the samples.

Return Chart

Here we measure the monthly return the DARWIN would have had if it had sent the order x seconds after it actually did.

To do this we take the prices of the underlying x seconds later using our tick-level price database. Then we calculate the trade’s return at that new price.

If the return is worse, the DARWIN, in that sample of 200 trades, did better than if it had opened x seconds later. In that case it would be toxic.

Showing the monthly return enables us to compare it with divergence which is also measured monthly. This in turn enables the manager to properly optimize capacity.

If a DARWIN has a divergence of -1%, but by fractionating it can get a -0.2%, you will know that you still have a fractionating margin. So, the tool is a great help in quantifying how much and how you can split the trades.

Many DARWINs have very different entry and exit toxicities. With this new tool you can also determine which orders to split and which not.

Bear in mind that the study includes 200 orders and does not exclude any. There may be orders that distort the chart in one direction or another.

Chart in pips

The second graph shows the difference in unit pips (difference in price divided by price and multiplied by 10000). The pips show the average difference in price the strategy would have gotten if it had placed the order x seconds later than it actually did.

We hope this new feature will be useful! Please give us as much feedback as you can to improve.


What’s about refinancing?
No used anymore or only for long term positions?

Stocks, futures (for indices, most major pairs, metals etc.) could be used to cut the risk on a pair/item.

Just curious with my question, as I appreciate this tool very much as it is also visible for investors and not only for Darwin managers.

So… worse LA is better capacity ?

Not a good thing for traders, It seems that a bad timing for the entries is a preference for LPs

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From the point of view of the liquidity provider, you have to hold a position at least 10 minutes. So you will mostly see a DD and can’t trade the M1 timeframe successfully.

In general, in the markets, you need to make money with your strategy from other participants (liquidity takers), not from Liquidity Providers. This is at the end what toxicity is telling you.
Be careful if you are doing it from LPs, because your alpha will not last too much, or can’t hold too much capacity.


So, if you trade 15m time frame, average 3 hours per trade and 10-15 pips…What should you do to improve your capacity without change the strategy? Is there any chance or you are doomed to get low investment forever? Thank you

If your toxicity is still low whenever you start having problems of divergence, you can fraction your trades to avoid sending too big volumes for the available market depth.
Once you reach again a maximum divergence, if your toxicity is still low, it means you can fraction your tades even more.

But important:
You need always to wait to fill your maximum capacity before starting to fraction. And only fraction if your toxicity is still low at that moment.

I hope it is clear what I am saying. Once you get to a point that your strategy is full and toxic, it means you reached your maximum capacity (for that pool of liquidity providers). You could try to find out ways of increasing it in other pools (brokers that act as pure market makers, for example)


Very good video and idea!

Few questions:

  1. You use 200 trades for defining toxicity… what is a “trade” (I will think opening and closing an order ?) … is the monthly rotation an indicator? My darwin has 167 now… so the toxicity is calculated in just over a month? … (seems too short time frame)

  2. There is a "toxicity in opening " and a “toxicity in closing” … nice to see the differences but shouldn’t be there a whole “toxicity” index ?

  3. are you planning to introduce an automatic “splitter service” for a darwin with a capacity problem but with a good toxicity index ? this should work better than applying a different spread…

Last… a consideration… as a LP don’t know a priori if the market will continue to go UP or DOWN or change trend when a trade is made… a toxic darwin will essentially be a good player in the market…especially if you misure the toxicity after 300 seconds… but I think is different to be a toxic darwin if you follow the trend instead to be a toxic darwin that enters in the market when the trend is against the trade. Normally if everybody is selling (trend down) and you put a buy trade there is a lot of liquidity… but if a news has just come out and everybody start buying and your darwin buy and the market continue to go up… you are a more toxic darwin and your liquidity should be worst.
am I wrong? are you considering this situation in the toxic index?

Thank you

  1. We use 200 entry orders for entries, and 200 exit orders (1 trade, two orders)
  2. Well, i don’t know what you achieve with that suggestion. As a trader and as an investor I think it is better to show them independently.
  3. Yes, I hope some day we can do it. Ideally we get to a point when the trader can delegate the capacity management to Darwinex, if they want. We could also create like a ‘‘shadow’’ Darwin for investors once the capacity is filled…I like the concept, but lets see.

Typical toxic strategies are those that trade with a combination of high volatility or low liquidity.
For example, Darwins that trade during a news realease, if they make consistent returns, they are probably toxic. Or Darwins that trade at market close (easy to find at Darwinex), are usually toxic too.

In normal market conditions, it is really difficult to be toxic unless you start sending really big volumes(above 50 millions), or /andyour average trade is around 10-15 pips.


So I will try to understand why i’m (BSL) “high toxic” in opening trades (not above 50 millions…average trade 28 pips in the last 3 months)… not trading near close or news… tipically against market trend.

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I want to think that because the sample is only 200 trades and the extreme high volatility suffered during March, most of traders toxicity now are higher than it use to be in “normal” trading conditions. Otherwise it’d be a freaking disaster.

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For now, we need to see the results taking into account only 200 orders. We will improve the accuracy to be able to see if the results are affected by outsiders of the sample.
It can happen yet. The study is not perfect.
Meanwhile I checked your stats and i don’t feel you should worry.


May I ask whether LPs can distinguish one Darwin’s order from another? That is, do they know if the order is coming from THA or HFD, etc or are all orders sent from Darwinex anonymous with respect to Darwins?



Good point. They are anonymous.
LPs have their ways to protect themselves of toxic flow. For example, ‘‘last look’’, increasing spreads at certain moments, decreasing liquidity…

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Why I can’t see toxicity of some darwins? I.E. ZVQ

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Maybe the problem is the way we rate the toxicity at the right hand of the chart.
THA toxicity chart is much more volatile but has the same rate as BSL.
It is important to read the data from the chart above the rating.


Probably a bug. I’ll report it to the tech team. Thank you


I understand that it is toxic if a trade is closed in less than 10 minutes, but I don’t understand why a trade should be toxic closed with 15 pips after 40 minutes. Can you explain that?

I thought LPs aggregate trades.

Well, maybe I said it wrong.
If a strategy makes on average 15 pips, it is more sensitive to a small amount in divergence. That means that the effect of drying the top of book will harm earlier the strategy, and therefore the trader will need to fraction the trades earlier.
The more the strategy depends on fractioning the trades, the easier it is that at certain level of iterations the strategy starts being toxic.


Sorry folks,

just to make it short - or probably not - and controversial. (Just to get adjusted to this place here, and probably not trying making ‘friends’ for today :wink: )

And to relax things first:
There was this anecdote from the infamous @gselevator (Goldman Sachs Elevator) Twitter Feed:

Q: What are you trading?
A: Size!

Now ‘Size’ gets us started here.

YES. There is toxic order flow. BUT this is probably not what everybody thinks of it in the first place. (At least as I see from the evolving discussion)

So for ‘Divergence’ and all the related parts: It is all about ‘Toxicity of Order Flow’ and ‘Adverse Selection’. NOT Strategies. Nobody could care less about your longer term ‘Strategy’ from a Liquidity Provider/Market Maker view.

I think there is (probably) a lack of understanding, how markets, auctions, orders books works in common. On the other hand this is understandable. Aside from trading there are not so many ‘two way’ markets. You are mostly in one role: Buyer - eg Grocery Store/Amazon/… or Seller - eg Ebay/Craigslist/…
Normally nobody is involved in a real 2 way market on a regular basis.

Just imagine - or remember :wink: - trading with your commodity broker on the phone:
Q: I want to trade 100 Widget Futures Jun20
A: 8 bid / 9 offer for 100
Q: buy 100
A: sold

This is making a market: price (quoting for selling and buying_) and size.

There is a concept of ‘transitioning’ time frames. (This, and some plain ‘basics’ about market structure could/should be another topic - maybe @bianca for help here). So - just to make it short - there is always chance for both parties on the deal to be right (or wrong) at the same time, but on their own time frame.
(Just for a start - this is where all of the financial media, experts and ‘Talking Heads’ fail: Bullish GOLD. OK, but what: next hour, today, next month, lifetime? )

Everybody lives in his (own) time frame and range environment. Ranging from ticks/(micro)seconds in HFT, to Macro with multi year exposure. With all kind of traders like Day/Swing/Trend (or whatever you can name it) in between.

And - as said - no LP/Market Maker cares what is your idea after the next few minutes (or xx ticks move away from your entry). Elvis has not only left the ‘building’, but even the ‘galaxy’.

Slippage/Divergence is all about ‘Market Micro Structure’. Order Book, only very short term. It is just too bad that the ‘normal’ FX/Spot Trader’ is not so much aware of it. But this is to some part a result of the available tool chain (and the decentralized OTC market). ‘Futures Traders’ on Exchanges, eg CMEGROUP/EUREX, are much more aware of all this.

Now for the ‘Darwins’: As I understand this for now, one scenario: The trader hits the market with a micro lot (1000USD) (with what ever order type). Now as this will be - first - internalized in the A-Book. So no problem if trading alone. But with investors (when we have a successful/invested Darwin), after a few milliseconds, for example additional 5 million (50 real full 100k lots) hit the market. Now this has to get to the LP/MM. And up from here ‘size’ matters.

So from a ‘Order Type’ technical view:
In the ‘Futures’ space - with a ‘centralized limit order book’ - you can see at least the ‘published’ available size in the order book. In Spot/FX - without some more sophisticated consolidated book via FIX - there is normally not so much to see. (There is probably still some iPhone/iPad App available from LMAX that shows at least the ‘theoretical’ spread for different sizes in their exchange, so this will get you just a glimpse of what could be expected)

Now the resolution as a ‘futures’ trader: You are ‘working’ your orders. Manually or via Argo. At least you can see what you are initially ‘against’. And do not ‘underestimate’ this: ‘Filling Orders’ - or ‘Trade Execution’ is a a serious business. Evolved from the ‘Floor’ to ‘Electronic’.

Where to go from here:
From my side: I can share some knowledge from ‘executing’ futures trades on a prop desk (maybe plus some ‘pseudo’ code in the ‘slack’ space for mimic this in FX/Spot).
And from ‘Darwinex’: it would like to see some kind of ‘workflow diagram’, with additional stats, screenshots for eg one basic use case:
What really happens if I hit the markets with 1 Lot (100k) or less, and my investors come in with +50 lots?