In this episode of the Explainers, we will look at how JSE Trade Explorer differentiates between Aggressive Orders and Passive Orders, which is an important concept underlying several of the metrics such as the Maker/Taker ratio.
While you will not see any references to these terms in graphs, filters or tables on the website, some metrics measure differences in trading behaviour between aggressive and passive trading styles which in turn affects trading performance. This note is to help users understand how JSE Trade Explorer implements this concept.
You can find previous versions of the JSE Trade Explorer Explainers by viewing the Resources section at the bottom of each page. Greater detail is provided in the Methodology section which can be found in the same place.
A Quick Definition
Aggressive Orders are those sent by firms to the order book with either no limit price, or a limit price which is set to trigger an immediate trade. These orders are immediately “Marketable”. They remove liquidity from the order book and are therefore deemed to be price-taking. On the other hand, Passive Orders are sent with a limit price such that the order rests in the order book without triggering an immediate trade. These are deemed to be price-making.
Aggressive Orders may be sent either with a time-in-force of “Immediate or Cancel” or with some time delay such as “Good for Day”. In the latter case, an order can behave as both an Aggressive Order and a Passive Order when it is immediately marketable but has an un-executed portion which proceeds to reside in the order book. Trade Explorer treats the whole order as Aggressive.
Measuring Execution Times
JSE Trade Explorer only includes Passive Orders in the calculation of:
- Average Time to Execute
- Average Resting Time
Average Time to Execute is the average time between an order arriving in the book (passively) and the first fill. Average Resting Time is the average time between an order arriving in the book (passively) and being completed (either by being fully filled or a cancelled, modification or expiry). In both cases, an order must have at least one fill to be counted. Aggressive orders are ignored because their first fill time and resting time is zero. In the case where an order is immediately Marketable but then rests any unexecuted quantity, the application treats it as an Aggressive Order for the duration of the order (meaning it is ignored).
Measuring the Balance Between Passive and Aggressive Orders
In the Maker/Taker ratio metric, JSE Trade Explorer explicitly measures the ratio between Passive Orders (“Maker”) and Aggressive Orders (“Taker”), weighted by value. If an order is part Aggressive and part Passive, the entire quantity is treated as Aggressive.
In the Spread Capture ratio, the application does not explicitly use the notion of Passive or Aggressive orders but instead measures the value of trades executed at the far touch, versus the value of trades executed at the near touch. The results are closely related to the Maker/Taker ratio.
Other Related Measures
Several other measures are related to the notion of passive and aggressive trading. For example, Order to Trade ratio may be higher for strategies that use mostly Passive Orders compared with Aggressive Orders as passive orders tend to experience lower overall fill rates. This may be typical of either market making activities or passive trading styles by institutional traders. Retail trades tend to use aggressive orders and therefore will experience a lower Order to Trade ratio and Spread Capture ratio.
Now that we have described the approach to the classification of Passive and Aggressive orders, we will in later editions of the Explainers provide more detail on the metrics and how they can help to explain trading performance.
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