A passive order is a trading order in which the order price is different from the market price.
An order is passive when traders set a price that the currency pair must reach before they go ahead with buying or selling.
Passive order occurs when a trader sets a price which is different from the bid or ask price.
A passive order sets a new price, creating a new level in the order book, waiting for other participants to hit it.
There is a time limit for the passive order.
If the transaction is not executed at the specified price within the given period, then the order expires and the trader will have to place a new one.
The further the price is from the market price, the more passive the order is.
In contrast, aggressive orders are when a trader executes the order to buy or sell straightaway.
A passive order waits for the price to come to it.
This is the opposite of an aggressive order, which chases the price.
What is a passive order?
The passive order can be placed when buying or selling a stock or other instruments.
- For buying, the price is set below the ask price.
- For selling, the price is set above the bid price.
Let’s say that the bid price for EUR/USD is 1.1050, and the asking price is 11052.
When traders want to buy the currency pair, they can decide to use a passive order.
They can place a buy order at 1.1049.
Since the asking price is 1.1050 the passive trade will not be executed immediately.
The order will be filled when the currency pair is bought at a price of 1.1049.
The trader has the possibility to cancel the order before it is filled.
One disadvantage of this order is that it may not be executed at the desired price. However, traders using passive orders could be waiting for an aggressive order to appear and accept the specified price.
What’s the difference between a passive order and an aggressive order?
Passive orders provide market liquidity.
Unlike passive order, with aggressive order, the trader defines a price at which the trade can be executed immediately.
Aggressive orders take market liquidity.
When an order price is closer to the market price, there is an aggressive order.
Unlike the passive order, the aggressive order will be executed because the price is set at the bid/ask price or above/below the price as long as there is enough volume available on the market.