Toxic Flow in Low Volume Assets
When someone trades against a liquidity provider using information the provider does not have, the provider loses money. In high volume markets, these losses are absorbed across thousands of trades. In low volume tokenized assets, one informed trade can wipe out weeks of income.
1. The Problem
A market maker posts a price to buy and a price to sell. The gap between them is the spread. The spread is only profitable if the market maker can flip the position: buy from one counterparty, sell to another, pocket the difference.
That breaks when the counterparty knows something the market maker does not. An insider who knows a fund's NAV (net asset value) is about to drop sells at today's price. The market maker buys, unaware. The NAV drops. The market maker holds a position worth less than what was paid. The insider captured the difference.
In liquid markets, this cost is manageable. A market maker on the S&P 500 loses on a handful of informed trades but earns the spread on thousands of uninformed ones. The wins cover the losses.
In a tokenized RWA that trades a few times a day, there are not enough uninformed trades to absorb the cost. One informed trade can erase weeks of spread income.