CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. -- % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Understanding Capacity & Toxic Flow

In this new #darwinex-uncut episode, Juan Colón, CEO @ Darwinex talks about how the capacity of your trading strategy scales as you attract more assets under management (AuM).

He discusses how the:

  1. Assets
  2. Times of day (high vs low liquidity hours),
  3. Size and
  4. Toxicity

… of your trades affect the trading conditions you experience.

He also goes deeper into how Liquidity Providers (LPs) make money, and how LPs look at the value and toxicity of order flow.

Enjoy!



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Thanks for sharing @bianka !

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So basically trader with alpha is a toxic flow for LPs. Vision of darwinex to become hub of traders with alpha so when this vision become reality then darwinex flow may be consider as a toxic flow by LPs.
It seems to me that vision of darwinex is not align with interest of LPs. How will darwinex deals with above situation when LPs are no longer interested to absorb the toxic flow of darwinex.

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No,that is not how it works.HFD orders(having big AuM and having at the same time obvious alpha) are very welcome to LP because,the way he trades,they collect spread on his big orders and then comfortably use that orders to match opposing orders from unsuccessful customers in their Order book.It is even better if they collect also commissions from those people and not only spreads-like Saxo is doing.So everything is internalized in their Order book and they don’t have to send that risk outside to other big boys,because that diminishes their profit.They don’t like to warehouse Risk,they want profits with as little risk as possible and traders like HFD are helpful with this.

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My understanding is that flow toxicity depends on how price moves against a strategy’s orders in the seconds / few minutes immediately after LPs receive the orders. If price moves in favour of the trader too often immediately after sending an entry or exit order, LPs tag it as toxic flow.

But for producing alpha consistently, it is not necessary that trades become profitable immediately after sending them.

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@bianka
How do LPs know the trader behind an order to track this?
Is the account number sent or just an ongoing transaction number?

They don’t know the trader behind an order. More on this in the last couple of minutes of the above video.

1 Like