Iceberg Orders

Iceberg Orders Trading Strategy Explained

6 min read

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 visible while the larger portion remains ‘below the surface.’ The hidden portions of Iceberg orders are often referred to as reserve orders.

Iceberg Orders Example

This is an example of an iceberg order with the Interactive Brokers Mosaic platform.

With iceberg orders, there are hidden and visible parts. This helps to mask the true size of large orders. For instance, an order of 400,000 units may be broken 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 is the only one 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 from the retail trader.

The more you know, the better off you’ll be. New traders often 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.

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Why Use Them?

Buyers and sellers opt for a hidden order to avoid influencing the market with large transactions. A large purchase order might increase prices as the system interprets the move as increasing demand.

Other buyers watching the market closely may 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 protects their 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. Using iceberg orders, a selling trader can help prevent plunging values and lower sales revenues.

Placing an Iceberg Order

Traders should use Direct Market Access (DMA) services to place iceberg orders. 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?

In a hidden order, the broker takes a large order and breaks it into multiple smaller orders. However, you can only see a small amount of those orders. The rest don’t become visible until the orders have been filled. And then, surprise!

How to Capitalize on Iceberg Orders

You can capitalize on this order by buying and selling strategically as a trader. A trader with a high volume of units can use the iceberg strategy to sell them 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 icebergs can improve their chances by acting swiftly to prevent these orders from blocking their sales. One strategy that may work is lowering the unit price just enough to attract buyers and get units sold. The goal is to jump ahead of these orders, which may eventually soak up the selling capacity.

Can You Detect Them?

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 from the same market maker.  

Details of a hidden 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 this order is if the bid or asking price is the same as 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.” To prevent influences on the market and protect their interests, traders buying or selling in large volumes gravitate towards iceberg orders.

Detecting these orders and taking calculated action may help traders maintain a competitive edge and reap real rewards from their trading activities.

Frequently Asked Questions

Traders identify iceberg orders when they see several limit orders coming from the same market maker repeatedly. For example, an institutional investor might segregate 500,000 shares into ten different orders of 50,000 shares each.

A hidden order, aka iceberg order, is when small blocks of the overall traders' position are available to market participants.

Iceberg orders are allowed not to show large orders on market depth chains. It helps to lower the cost of trade as well.

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