Passive order definition
A trading order in which the order price is different from the market price
Passive order meaning
Passive order occurs when a trader sets a price which is different from the bid or offer price. 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.
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. When traders want to sell an asset, they set the offer price above the bid price.
Let's say that the bid price for stock A is €3.00, and the asking price is €3.05. When traders want to buy the stock, they can decide to use a passive order. They can place a buy order at €3.00. Since the asking price is €3.05, the passive trade will not be executed immediately. The order will be filled when the stock is bought at a price of €3.00. 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.
Passive order versus aggressive order
Unlike passive order, with aggressive order, the trader defines a price at which the trade can be executed immediately. Aggressive order is draining the 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.