Aggressor Traders: Definition, Mechanism, and Market Effects

What Does an Aggressor Trader Mean?

Aggressor traders are market participants who actively remove liquidity by executing trades instantly at prevailing market prices. Instead of placing limit orders that wait to be matched, these traders buy at the current asking price or sell at the current bidding price, ensuring their orders are filled immediately.

Unlike passive traders who contribute liquidity by placing bids and offers that may not be executed right away, aggressors take liquidity away by matching the best available prices. In modern electronic markets, both human traders and algorithmic systems can act as aggressors.

Key Insights

• Aggressors remove liquidity by placing immediate buy or sell orders at the best available market prices.
• Their orders execute instantly because they accept the current ask or bid prices.
• This behavior tends to push prices higher when buying and lower when selling, potentially increasing market volatility and reducing liquidity.
• Conversely, passive traders add liquidity by placing limit orders that may remain unfilled until matched.

How Aggressors Operate in the Market

Aggressors analyze order books on platforms like futures exchanges, where bids and offers are listed at various price levels. The best bid and best ask define the bid-ask spread, which fluctuates with market conditions and available contract quantities.

For instance, if the best bid for a crude oil futures contract is $60.01 for 10 contracts and the best ask is $60.11 for 15 contracts, an aggressor would immediately buy 15 contracts at $60.11 or sell 10 contracts at $60.01.

In contrast, a passive buyer might place a bid slightly above the best bid, such as $60.05, and a passive seller might offer a price slightly below the best ask. Passive trading helps narrow spreads and boosts liquidity, whereas aggressive trading removes it.

Impact of Aggressors on Market Liquidity

Market participants have visibility into the order book, which lists all current bids and offers, including those far from the current market price. For example, bids below $60.01 might include 15 contracts at $60.00 or 20 contracts at $59.99, while asks above $60.11 could be 12 contracts at $60.12 or 15 contracts at $60.13.

By executing trades immediately at the best bid or ask, aggressors drive prices upward when buying and downward when selling. This dynamic can cause increased price volatility, especially in thin or imbalanced markets where fewer participants remain due to these aggressive moves.

Note on Market Volatility

Volatility refers to significant price swings, often defined as movements exceeding one percent over a sustained period. Aggressor activity can contribute to such fluctuations by rapidly shifting prices.

Additional Considerations

Highly liquid markets offer advantages like quick and easy conversion of investments to cash. Reduced liquidity often leads to greater volatility, which might discourage investor participation.

To encourage liquidity provision, some electronic exchanges offer fee rebates to traders who add liquidity by placing limit orders. Conversely, they may impose higher fees on aggressors who remove liquidity by immediately matching the best bid or ask prices.

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