Order Flow Intro: Passive and Active Order Flow

What's going on, guys? This is Ryan with Blockroots. And in this order flow roadmap series, it's going to be a short video on passive versus active order flow. And if you're a blockroots member for quite some time now, you've likely heard me refer to these two terms quite frequently. So what is passive order flow? Okay, this is the advertisement, alright? This is passive, it's not aggressive. It is essentially that you are placing a limit order on the books, either a resting limit bid or resting limit offer. Alright, you are saying I want to get out at this price or get in at this price. It's a more patient way of entering or exiting the market. So anytime you join the order book, whether you're hidden or visible, this is a passive means of entering or exiting. So you become part of the passive order flow. This is the advertisement. This is saying hit me here, I want to get out or hit me here, I want to get in to the opposing side of the market. And this is typically used by larger players for a few different reasons. So more often than not we see the heavier hand is in passive order flow or in the form of passive order flow. And there's a few reasons why larger players might use passive means. One, for transaction related costs, paying to take liquidity, paying for slippage, all those things that you incur when you're not using a passive means of entering or exiting. So when you're taking liquidity, you're using a market execution. So larger players are typically going to be using passive means to enter and exit because it's more cost effective, they won't incur slippage and they also won't reveal their intentions as greatly. So when you are a large trader or large investor, if you were to get out of the market all at once within market execution, you would pretty much reveal to the rest of the market what your intentions were. If, let's say you sell 5 million contracts of Bitcoin futures on the perp swaps and it's at the top of a structure, well, you pretty much just told everyone that you want to be out of the market and you're more likely at that point going to influence the market. So this is a more surreptitious or sneaky, clandestine way of getting in and out of the market. For larger players, more often than not we see that this determines the greater market structure. So when we talk about other time frame controllers or people who are higher time frame participants, all right, and they're interested in getting in at major Structural higher time frame support or getting out at major structural higher time frame resistance. All right, we'll see that it is their decisions that often influence the greater market structure. Okay. So they are typically going to be who steps in at higher time frame support and who is getting out at higher time frame resistance ultimately governing the greater structures or trends that the market is finding itself within. Okay, and another thing, passive orders are makers of liquidity. So you've heard of the term maker versus taker. Okay, so if you're using a passive means of entering or exiting the market, whether you are trying to enter and you're placing a limit bid, right? So placing a limit order on the bid, or you're looking to exit the market and you're placing a limit offer on the ask side, so you're providing liquidity because some market execution is going to be hitting into you. Okay. And as I said, often a heavier hand in markets for a ton of different reasons, and then with more of them. So with more passive order flow or with more advertisements, let's say for bids and offers, we have less volatility, often. So when there is lower liquidity, meaning there are less options or advertisements for getting in, whether or not it's bids and offers, there's an increase in volatility because when you have those market executions, they cause both to sell, skip up and down. And then how do we place a passive order really quickly? We join the dom or the depth of market or join the order book. We place a limit order on the books in the form of either a bid or an offer to sell. So a bid to buy an offer and ask to sell. So we join the order book. So we are using a limit order to enter or exit the market. And as a reminder, these can be hidden or they can be visible.

There are times when there are certain authentic orders on the books and we'll see ad support that the bid will stack up. And these are providing the market with one, a reason to be psychologically supportive of the move because we see that everyone is on the side of it. And these can also be at resistance, we'll see the offer stack up then. There are some times though, when we will get false signals or essentially what are called spoofs, where let's say that there's a large order flashed at the top of the bid right under the current market price and it makes you feel confident. So maybe at that point you say, oh, there's definitely a lot of support here. So what am I going to do? I'm going to Jump into the really small order that is listed right above the market price in the offer. Okay. And really what happened was there was a large trader that placed a, let's just say the offer, the order wasn't genuine in the bid. And what they wanted to do is entice you to jump their. Their bid rather right into the offer. And what you were doing was filling their short. So this is what spoofing is, right? So there's definitely some trickery that goes on, but they can also be hidden. So when the order is hidden, what we'll see is that there will be some type of iceberg order, for example. And this is so that the position or the players is not trying to. Or rather their intentions are such that they don't want to reveal their position. They don't want to reveal that they're trying to currently get out with 10 million contracts. Because if you knew that someone was genuinely looking to exit the market with 10 million contracts, then what's the incentive for you to stay in? If someone has more information than you do, then you'll likely try to exit as well, and they potentially might not get their exit. Or in the case of trying to enter in the market, they might not get their entry. So as a reminder, this is a patient way of entering in the market because we are essentially waiting for someone to hit into us. Because as I said before, this is an advertisement. This is not a guarantee that you're going to be getting in unless someone else hits you. So it takes us on to active order flow. Okay, so active order flow, this is the aggressor, this is active. These are market executions at the bid and the offer. So this is essentially when you're taking liquidity. So if you see offers that are offers on the ask to sell, you're essentially taking right from them because you want to get in right away. You don't care about the price, so you're buying up the available liquidity that is in the offer. Same can be said for someone who's looking to sell or exit the market. If there are orders in the bid relative to the current market price, you're going to be taking those orders from the bid to fill your position. And because of this, if there are not a lot of orders relative to current market price, whether in the bid or the ask on the offer, you will incur slippage. So if you cannot get filled until a certain distance, then you're going to be paying up that price or paying down to the lowest bid until your offer, or rather your Sell order is filled or your buy order is filled. Okay? So these are takers of the liquidity that's provided by passive order flow. So the taker of liquidity is the market execution. And when there is lower liquidity, so when volumes are dropping off and liquidity is drying up, when we have an increase in market orders, we can often see that market orders will overtake passive order flow and will be the heavier hand at sometimes. And these market orders will increase overall market volatility. So think when there are not a lot of advertisements on the books to either buy or sell. When people actually do buy or sell, they're going to be causing the market to move drastically more often than there would be had there been more offers or bids on the actual order book. So lastly, active order flow is often the weaker hand. Often these are your smaller lots, your odd lots, your smaller traders, and more often than not, because they are looking to get in as fast as possible, all right? They're typically the, they're not the smarter trader. This is not the more cost effective way of entering in the market. But if you are a smaller position and there is a decent amount of liquidity relative to where the current market price is, sometimes it is a good idea to get in with the market execution or with active order flow because you know that there is the available liquidity and you're guaranteed to get into the market. So there are times when being part of the active order flow or using a market order, for example, is to your benefit. If you are trading derivatives and you need to get out of the market, you need to get out either with a stop for your short or stop for your long. Using a market order guarantees that you're taken out of the market and any slippage might be worth paying rather than going bankrupt or liquidating your position. So this is often though the weaker hand or the smaller traders, and this will tie into. When we talk about cumulative volume delta divergence, when we're talking about divergences between the weaker hand and the heavier hand, or identifying what direction rather where the heavier hand sits with relation to price. Okay, we could identify where the heavier hand sits when we know who the weaker hand is. And then we could put ourselves in line with hopefully where the heavier hand is and what their intentions are. Okay. Or where they are positioned and what their intentions are for the market. Okay, so how do we place an active or aggressive order? All right, we're essentially taking liquidity off the book at the bid and the ask. Okay? So we're using a market Execution. And because of this, because we're trying to absolutely get in or absolutely get out. All right, in the case of, let's say I mentioned that you would want to use this for a stop order, but you also might want to use this if there's a breakout, okay? Because a lot of times you might not get that retest for a breakout, all right? There might be a higher time frame support or resistance that is finally giving way and there's acceptance on the other side of it. And if you're waiting for the market to turn around and retest that area before moving forward, more often than not you could get left behind. So sometimes it is to your benefit in a very impatient way because you don't have any time to wait for a pullback, because you might not get one to enter in the market with a market execution or a form of active order flow, or being the aggressive, rather. So this is an impatient way of entering the market, or an impatient way of, as I also should mention, exiting the market if we're looking to get out of a position. So let's take a look at how we would actually go about using these on something like Bybit. So here is the BYBIT platform. Okay, this is an awesome platform. Josh and I talk about it often. We think that it is the number one platform right now to trade perp swaps. I know they have a lot of other stuff coming down the pipeline. But really quick, if we are looking to become part of the passive order flow, what would we be doing? We'd be going to the limit order and we'd be placing either a limit buy or a limit sell. And essentially what would happen is we would be placed right on either one of these. So either the offers or the asks right here, or if we're looking to buy, it would be placed right here. So what that means is with the current price right now, we would not get in right away until someone jumped the spread and came into our offer, or rather came into our order. So this does not guarantee that we will be filled right away, but if price comes to us, it guarantees that we will be filled at that price, depending on how much the opposing side is looking to buy or sell, we might not get filled all the way, but at least we'd be guaranteed that we'd be getting in or out at the price that we are advertising for. So these are the advertisements, right? This is the passive order flow. This is the resting limits to either buy or sell. And these are the visible ones. So there'll be times when you'll see something like an iceberg, where it will be a really small order right here, it'll stay here, but it'll keep reflashing and refilling. What you'll see though is though say that the contract, the contract offered or the contract value offered, let's say it's like 10,000 contracts offered right here. All right, current market price, 10,000 contracts offered right here in the first offer. But we see that it keeps refreshing. Goes down 9,000, then goes back up to 10, goes down to 9,000, keeps going back up to 10. And under that, on the recent trades, we see that greater than 10,000 contracts have traded at that price. All right, so that's weird. If there was 10,000 contracts sitting in the offer right here and then the next offer up had say 100,000. Why after going through 10,000 on the recent trades, as in these are the finalized executions, why then do we still have this offer right here? Well, that's probably because it's a hidden offer at that point. It's an iceberg order. And what you'll see when you have one of these is there might be a really large bid right here. So it's provoking you to say, okay, big bid. Alright, I want to be on this side because this guy's trying to buy a lot. Let me jump right into this offer. Meanwhile, the big offer was right here. It was just hidden. And the intentions were to fill a short and move the market in the opposite direction. But we'll do a whole other roadmap on that. But nevertheless, this is the passive order flow. Now, market execution. All we do is we name our quantity. We hit buy or sell, and immediately, let's say we're looking to buy, let's say we're looking to buy 10,000 or 100,000 contracts. What would happen when we click buy? We would buy immediately what was available. So say in this case, I want to buy a million contracts. If I hit buy right away, it would buy from here, likely, okay, to here and all the way up to here. Because currently, as you can tell, 400,000 plus almost 400,000, 300,000, these are the available contracts to sell. And if I'm a market executor, if I am a form of active earner or the aggressor, in terms of order flow, I'm taking available liquidity. Same can be said with someone who's looking to sell and exit the market. You're going to be selling into what is available, but you are absolutely going to be getting out or getting in, but it's going to be at what is the best available price relative to the current price. This is passive order flow and active order flow. And the most important thing is going to be determining how these two are interacting. When we talk about cumulative volume delta divergence, which we're going to have a separate video on, we're going to be talking about areas where, for example, so let's say that we are looking at the current price and we see that right here price is moving up, but price is relatively flat right here. But instead we see that there's been a ton of active orders through this area. So there's been a ton of buying activity continuously up, but price has really stalled, really. So even though there's all this buying and the aggressor is clearly buying up this area, this is not moving. So this indicates that the heavier hand, in the form of passive order flow, is absorbing all that. And when you notice something like that, what side of the market do you want to be on? Do you still want to be buying at that point when you recognize that something is absorbing all that buying power? No, you want to be lined up with the passive order flow or the heavier hand right now likely absorbing all that order flow and with intentions of moving the market down. Or they are at least positioned such that when they are selling at that point, they're either taking profits for a reason or they are opening shorts for a reason. And it's not so that the market can continue moving up. So that's that, guys. Hopefully this has been informative. This is the Bybit Testnet. I suggest you do all of your practice trading on it. This is Ryan with blockroots. As always, exercise proper risk management and trade effective.