Aggressors in Trading: Definition, Impact on Market Liquidity, and Strategies

An aggressor in trading is a participant who removes liquidity from the markets by executing buy and sell orders at current at-market prices. This immediate action contrasts with passive traders, who aim to add liquidity by placing bids and offers that may not be immediately filled or executed.

Aggressors engage in pricing analysis in markets such as futures exchanges, where the best bid-to-buy and best offer-to-sell determine the bid-ask spread. They typically act by buying at the best asking price or selling at the best bid price, ensuring immediate execution of their orders. This approach differs from passive trading, which seeks to narrow spreads and enhance market liquidity.

Aggressors’ immediate action at current bid or asking prices can lead to volatility by pushing other traders out of the market. As aggressors continue to buy at higher prices or sell at lower prices, they reduce liquidity and contribute to market imbalances. This volatility may drive investors away from the market, affecting overall liquidity.

Passive traders typically use strategies such as providing liquidity by placing limit orders away from the current market price. They aim to profit from the bid-ask spread by waiting for orders to be filled.

Aggressors and market makers both contribute to market liquidity, but they operate differently. Market makers continuously provide bid and ask prices for a security and profit from the bid-ask spread, while aggressors execute trades at existing bid and ask prices without maintaining a continuous presence in the market.

While aggressors are prevalent in electronic markets due to the ease of immediate execution, they can also operate in traditional open outcry trading environments. However, electronic markets facilitate faster execution and attract a higher volume of aggressive trading.