What Is an Aggressor?

Aggressors are traders that take liquidity out of the markets. Rather than entering bids for shares, aggressors buy at-market at the current ask price. They will also sell at the current at-market bid prices rather than specifying a selling price. By purchasing available shares or contracts at the current at-market price, aggressors place orders which have immediate execution.

Other traders are passive because they add liquidity to markets by entering bids and offers, which may not have an immediate filling or execution. In today’s electronic markets, traders may be human or they may be computers running automated algorithmic trading programs.

Key Takeaways

  • Aggressors are traders who remove liquidity from the markets by entering buy and sell orders at current at-market prices.
  • Because aggressors purchase available shares or contracts at the current at-market price, their orders are executed immediately.
  • This immediate action means aggressors sell at lower and lower prices and buy at higher and higher prices, thereby pushing other traders out and taking liquidity out of the market.
  • In contrast, passive traders add liquidity to the market by placing trades with bids and offers, which may not be immediately filled or executed.

Understanding Aggressors

Aggressors review pricing in markets such as futures exchanges, which have a basis on a range of orders at various prices. The best bid-to-buy and best offer-to-sell will set the bid-ask spread. The difference between those two prices will vary depending on the prevailing market conditions. The number of contracts available for purchase or sale may also be different.

For example, if the bid-ask spread for a specific crude oil contract is ten contracts at $60.01 bid/15 contracts at $60.11 ask, an aggressor would immediately buy 15 contracts at the best asking price of $60.11 or instantly sell ten contracts at the best bid of $60.01.

A passive trader motivated to buy a contract might offer a bit more, for example, $60.05. The passive trader inclined to sell might suggest less. Passive trading tends to narrow spreads and add liquidity to markets, while aggressive trading removes liquidity.

How Aggressors Impact Market Liquidity

Market participants have access to the order book, which shows a list of all current bids and offers, some of which may not be close to the current market price. Using our example above, the best proposal for a crude oil contract is ten contracts at $60.01. Other bids may rest below that price, such as 15 contracts for $60.00 or 20 contracts at $59.99.

Also, other ask offers may be above the best current asking price. If the best offer is currently $60.11, higher offerings might be 12 contracts for sale at $60.12 or 15 contracts at $60.13.

By taking immediate action at the current bid or asking price, aggressors continue to sell at lower and lower costs or buy at higher and higher prices. This squeezing causes volatility, which will become more common as markets get thin and imbalanced as other traders are pushed out.

Volatility in the stock market is associated with big swings in prices; typically, a volatile market is when the stock market rises or falls more than one percent over a sustained time.

Special Considerations

Liquid markets have many advantages, including the ability for investors to transfer their investments into cash in an accessible and timely fashion. Anything that reduces market liquidity can lead to volatility, which may drive investors away from a particular market.

Because of this, some electronic marketplaces now offer fee credits for traders who wait for order fills and add liquidity to the markets. In essence, they are rewarding the passive trading strategy. Conversely, they may charge additional fees to aggressors who remove liquidity by immediately taking the best bid or offer.