An aggressive stock market order is one that removes liquidity posted to the books. Usually an aggressive order crosses the Bid– Ask spread. In other words an aggressive buy order will be priced on the offer or higher, and an aggressive sell order will be priced on the bid or lower.
An aggressive order will always be executed assuming enough shares are posted on the books to fill the order. A passive order, which will sit on the books, has no guarantee of being transacted. A passive order will only transacts if an aggressive order from another trader removes the shares. An order may transact in part aggressively and in part passively as well if the aggressive order is larger than there are posted shares to remove. The shares that remove liquidity will execute aggressively and the remaining shares will be posted to the books to execute passively by adding liquidity.
Let’s look at a couple examples to illustrate how an aggressive order works.
Let’s say that stock ABC has a bid of $1.00, and an offer of $1.01.
If a trader wants to purchase shares, he has options. If he feels no pressure to be executed, he can post his buy order on $1.00 and this will add liquidity on the book. If he gets filled it will be filled passively and his price will be $1.00.
Let’s say that the trader is worried that the price will move up away from him, and he wants to be executed immediately. Let’s also say that his order is for 100 shares, and there are 500 shares posted on the offer at $1.01 for sale. If the trader puts his buy order in at price $1.01, his 100 share order will transact immediately at price $1.01. This is an aggressive order.
Let’s say that instead of 100 shares, the trader has 1,000 shares he wishes to buy. Let’s say that there are the same 500 shares on the offer at $1.01 and 200 shares posted on $1.02. The buyer could put the full 1000 share order on price $1.02. This order will aggressively remove the 500 shares on $1.01, and also remove the 200 shares on price $1.02. The trader will execute a total of 700 shares at an average price of $1.013. The remaining 300 shares of the 1000 share order will post on $1.02. This will be the new bid of the stock, and if the order fills it will fill passively and the trader will have an average execution price of $1.015.
Clearly the benefits of an aggressive order are the speed and certainty at which the order transacts. The drawback is that the trader will give up a price spread in order to pay for the transaction certainty.
Some ECNs will pay a small rebate to remove liquidity aggressively. Other ECN’s will charge a high fee to remove liquidity, and pay a high rebate to add liquidity to the books. When sending an aggressive order a trader must be very aware of which markets the order will remove liquidity from because the transaction costs can vary significantly. Sometimes it may be beneficial for a trader to use dark pools for aggressive orders because the costs may be lower and there may be more available liquidity at better prices.
However he chooses to execute, understanding the benefits and drawbacks of using aggressive orders are important to the trader.