Passive order

An order either waits or takes.

A passive order waits. It is a buy order priced below the prevailing market price, or a sell order priced above it, so nothing matches it straight away and it sits in the exchange's order book until someone comes to it — or until it is modified or cancelled. Limit orders are thus passive orders, in the workbook's classification.

An active order takes. It is an order to buy or sell at the prevailing market price, which immediately gets matched with orders already in the book. Market orders are active orders.

The workbook adds a scale: the farther the order price is from the prevailing market price, the more passive the order.

Effect on liquidity. This is the part the workbook stresses:

A passive order, until it is modified or cancelled, is a commitment to buy or sell at the order price. Each one adds a new level to the book, which is what lets the next active order execute without moving the price far.

How long it waits. After an order is placed, the system searches for a match. If none is found, the order stays in the system until the end of the trading day, or until it is cancelled. Orders can be modified or cancelled after placement but before execution. Matching follows price-time priority.

The workbook's own case: the last traded price of ABC Ltd is Rs 105.10. A buy order at Rs 102.45 and a sell order at Rs 107.70 are both passive — neither can match at the current price.

Now the workbook's order book for XYZ Co, where the best bid is Rs 131.95 and the best offer Rs 132.05 (quantities below are illustrative):

• Kavya places a limit buy for 100 shares at Rs 131.00. It joins the book below the best bid. Passive, and — being Rs 0.95 away — more passive than an order at Rs 131.90. The workbook notes an order like this is unlikely to be matched.
• Rohan places a market buy for 300 shares. It is active. It takes all 200 shares at Rs 132.05 and 100 at Rs 132.25. Rohan's average price is (200 × 132.05 + 100 × 132.25) ÷ 300 = Rs 132.12, and the Rs 132.05 level has disappeared from the book.

Kavya added a price level; Rohan removed one. That is the liquidity difference in one screen.

Chapter 4 (Secondary Markets) covers "Active and passive orders" right after the order book and limit-order discussion, just before Direct Market Access. Expect: which of two orders is passive given a last traded price; which kind adds liquidity; and the proactive/reactive labels.

• Passive adds liquidity; active drains it. The reverse is the commonest wrong answer.
• Passive = proactive; active = reactive. The labels feel backwards, so learn them as stated.
• A buy below market and a sell above market are passive. A buy above the last price is not passive.
• The farther from the market, the more passive — passivity is a matter of degree.
• Unmatched orders last until the end of the trading day or cancellation, in the workbook's description.
• A market order can execute at more than one price until its quantity is filled, as the workbook notes — which is how an active order eats through several levels of the book.