Toxicity is measured, not assumed: a flow source is toxic if the price after its trades reliably moves in its favour. That is why wholesalers pay for retail flow — it is the opposite, benign and unpredictive — and quote far more cautiously to institutional algorithms.
This segmentation drives structure. Flow perceived as toxic gets wider quotes, less size and more rejections; flow perceived as benign gets price-improvement and instant fills.
Example: a maker fills 500,000 shares from source A and the midpoint one minute later is 1.4 basis points against them on average — a $7,000 loss on $50 million of notional. Source B leaves them 0.3 basis points ahead. A is priced defensively or refused; B is competed for.
Related: adverse-selection, wholesaler, payment-for-order-flow, price-improvement