Aggressors are traders who remove liquidity from the market by entering buy and sell orders at current market prices. Rather than entering limit orders, aggressors buy the current market ask price or sell at the current bid price. Because aggressors purchase available contracts at the current 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.
What do Aggressors do?
Aggressors review pricing in a market that has a range of orders at various prices.
The best bid and best offer prices 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 EUR/USD is 1M units at 1.1010 / 1.1012, an aggressor would immediately buy 1M units at the best asking price of 1.1012 or instantly sell 1M units at the best bid of 1.1010. A passive trader motivated to buy EUR/USD might offer a bit more, for example, 1.1011
Passive trading tends to narrow spreads and add liquidity to markets, while aggressive trading removes liquidity.
How do Aggressors affect 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 available market price for EUR/USD is 1M units at 1.1010. Other bids may “res”t below that price, such as 2M units for 1.1009 or 3M units at 1.1008. Also, other ask offers may be above the best current asking price.
If the best offer is currently 1.1012, higher offerings might be 3M units for sale at 1.1013 or 2M units at 1.1014.
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.