How Markets Work · Pro · 5 min

Market microstructure and order flow basics

You can explain who drives a price move in the order book, what aggressive and passive orders are, and why the visible book never shows everything.

Who pushed the price

A candle on a chart shows where the price opened, how far it moved and where it closed. It does not show how it got there: who was in a hurry, who was waiting, and who quietly took the other side.

That is the subject of market microstructure, the study of how orders turn into prices. You already know its building blocks from this rubric. This lesson puts them together, so that you can read what the order book and the flow of trades say, and what they cannot say.

Aggressive and passive

Every trade has two sides:

The aggressor crosses the spread, usually with a market order. A buyer pays the ask, a seller hits the bid. The aggressor takes liquidity out of the book.
The passive side was already waiting with a limit order. It provides the liquidity.

Order flow is the stream of these trades and orders over time. When aggressive buyers dominate, they eat through the asks and the price rises. When aggressive sellers dominate, the price falls.

But passive orders matter just as much. A large passive seller at one price can absorb wave after wave of aggressive buying, and the price stalls. Traders call this absorption.

The visible book never shows everything:

Iceberg orders show only part of their size. On Xetra, for example, an iceberg order displays a peak, refills it from hidden volume when it is filled, and is not marked as an iceberg in the book.
Orders are changed and cancelled all the time, and large traders split orders over time and venues.

Some orders are deliberately misleading, and that is illegal. Spoofing, placing orders with the intent to cancel them before they are filled, is banned by US law. The US regulator CFTC names examples such as creating a false impression of depth. In the EU, the Market Abuse Regulation treats orders that give false signals about supply or demand as market manipulation.

Absorbed at 31

A fictional stock rises from 30 toward 31.

On the second day, aggressive buyers push it to 30.98. At 31.00, sell orders keep appearing.
On each of the next three days, the price climbs to just below 31.00 and turns back.

The pattern suggests a large seller at 31.00, perhaps with an iceberg order, absorbing all the buying. As long as the seller stays, the buyers cannot get through. If the seller is finished, the price may move up quickly. Whether that happens, the book cannot tell you in advance. Order flow gives you context for a decision, not the decision itself.

Common mistakes

Treating the book as a promise. Visible orders can be cancelled in a millisecond.
Reading flow as a forecast. Order flow describes what is happening now, not what comes next.
Forgetting other venues. Part of the trading happens elsewhere, including in dark pools.
Placing fake orders yourself. Orders you do not intend to fill can be market manipulation.

The takeaway

Aggressive orders move the price, passive orders absorb it. The book shows only part of the picture, and fake orders are illegal.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the levels that aggressive buyers have taken out.

Tap the chart.

Market buys took out the asks from the bottom up. That is aggressive order flow on the buy side.
2Who is the aggressor in a trade?

The aggressor takes liquidity from the book. The passive side was waiting there with a limit order.
3What is an iceberg order?

On Xetra, for example, an iceberg order shows a peak and refills it from hidden volume. It is not marked as an iceberg in the book.
4A trader places large orders with the intent to cancel them before they are filled, to move the price. What is this?

US law bans bidding or offering with the intent to cancel before execution. In the EU, similar conduct is market manipulation.

of 4 correct.