Most traders will encounter iceberg orders at some point in their trading activities. These are orders that have been broken into smaller portions. Or in other words segmented. These smaller portions are called lots or limit orders. They’ve been given the name ‘iceberg’ because just as it is with the iceberg, it’s the smaller portion that’s visible while the larger portion remains ‘below the surface’. The hidden portions of Iceberg orders are often referred to as reserve orders.
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How Do Iceberg Orders Work?
With iceberg orders, there are hidden and visible parts. And this helps to mask the true size of large orders. An order of 400,000 units for instance, may be broken down into ten or more parts.
These hidden orders only become visible after the visible order is completed. If for instance a large order has been broken down into ten parts, the first of those ten orders is the only one that is visible at the outset.
Once that first order has been filled, the second of the ten orders becomes visible. This process continues until the entire order is filled. Iceberg orders may be created in equal parts.
But the sizes may also be varied. This could be where something like dark pool trading can come in handy. Dark pools are no longer hidden to the retail trader.
The more you know, the better off you’ll be. Many times new traders don’t realize that they’re up against algos when trading. And when a trade goes against them, they’re not sure why. It’s not just fellow retail traders you’re up against. As Dave Portnoy says, you have to worry about “the suits” too.
Why Use Them?
Buyers and sellers opt for an iceberg order because when they want to avoid influencing the market with large transactions. A large purchase order might lead to increased prices as the system interprets the move as an increase in demand.
Additionally, other buyers who are watching the market closely may decide to also target the same stock/shares for purchase. And in trading, as in any other economic venture an increase in demand triggers an increase in prices.
Sellers too, may decide to increase their prices when they see a large order. This increase in prices will increase costs for traders looking to buy.
A trader seeking to make a large purchase is therefore protecting his/her own interests by using iceberg orders. On the other hand, a large volume sale might force prices down as trading pundits may view the sale as a signal of a pending downturn in value.
This in turn could trigger panic selling and when more sellers compete in a limited buyers’ market, prices tend to fall. A trader who is selling can help to prevent plunging values and lowered sale revenues by using iceberg orders.
Placing an Iceberg Order
In order to place iceberg orders, traders should use Direct Market Access (DMA) services. This means therefore that they need to use platforms that offer this facility. Platforms that offer the option to create and place iceberg orders often facilitate an automatic process by which traders input their instructions and the system does the rest of the job, segmenting and posting the iceberg order.
What Is a Hidden Order?
A hidden order is one where the broker take a large order and breaks it down into multiple smaller orders. However, you can only see a small amount of those orders. And the rest don’t become visible until the orders have filled. And then surprise!
How to Capitalize on Iceberg Orders
As a trader you can capitalize on this order by buying and selling strategically. A trader with a high volume of units to sell can use the iceberg strategy to get them sold at an advantageous price. From a buyer’s perspective, iceberg orders, once detected present an opportunity to acquire units at reasonable prices.
Sellers who detect iceberg’s can improve their chances by acting swiftly to prevent these orders from blocking their own sales. One strategy that may work is lowering the unit price just enough to attract buyers and get units sold. The goal here is to try to jump ahead of these orders which may eventually soak up the selling capacity.
Can You Detect Them?
In order to capitalize on iceberg orders traders must first be able to detect these types of trading orders. Level two traders are more likely to encounter them as it’s at this level that these types of orders are posted.
Traders should look out for limit orders that come in a sequence and also come from the same market maker.
Details of an iceberg order can be found in the trades column. If a print is repeated in this column, it’s likely to be an iceberg. Another sign of an this order is if the bid or asking price is the same as that in the order book.
Detecting an iceberg order can be a pretty tedious task. A less complicated route is for traders to use tools like BookMap to see “iceberg orders”. In order to prevent influences on the market and protect their own interests, traders who are buying or selling in large volumes gravitate towards iceberg orders.
Detecting these orders and taking calculated action may help traders maintain the competitive edge and reap real rewards from their trading activities.