Iceberg Order

As a trader, you may have heard about iceberg orders, but you may not know what they are or how they work. In this blog post, we will explain what an iceberg order is and how to use it in trading.

What is an Iceberg Order?

An iceberg order is a large order that is split into smaller pieces, keeping the bulk of the order hidden from the market. This type of order is also known as a hidden order or a stealth order.

The primary reason for using an iceberg order is to avoid slippage, which can occur when large orders are executed in the market. Slippage is the difference between the expected price of an order and the price at which it is executed.

If a trader enters a large order into the market, the price will likely move against them, causing slippage. This is because the market absorbs the large order, and the price adjusts accordingly. By splitting the order into smaller pieces, the bulk of the order remains hidden, reducing the likelihood of slippage.

How do Iceberg Orders Work?

When a trader places an iceberg order, the visible portion of the order is displayed on the order book, and the hidden portion is kept concealed. As the visible portion of the order is executed, the hidden portion is gradually revealed until the order is filled completely.

For example, suppose a trader wants to buy 10,000 shares of a particular stock. Instead of entering a single order for 10,000 shares, they may split it into 10 smaller orders of 1,000 shares each.

They may then enter these smaller orders into the market using a limit order type, so they execute at a specific price. The visible portion of the order will be 1,000 shares, and the hidden portion will be 9,000 shares. As each visible order executes, the remaining hidden quantity will be updated, and the order book will reflect the updated quantity.

Since the visible portion of the order is public information, other traders in the market can see it and may try to front run or take advantage of the order. Therefore, it is crucial to ensure that the visible portion of the order is a reasonable size compared to the overall order size.

Benefits of Iceberg Orders

There are several benefits to using iceberg orders when trading, including:

• Reduced Market Impact: By keeping the bulk of the order hidden, iceberg orders can minimize the market impact of large orders. This is especially important when trading in illiquid markets or stocks with a low trading volume.
• Increased Anonymity: Iceberg orders offer a degree of anonymity since they hide the size and intent of the order from the market. This can be useful when trading sensitive or confidential information.
• Better Control: By splitting large orders into smaller pieces, traders can have greater control over the execution process and adjust the order as needed to ensure optimal execution.

Conclusion

Iceberg orders are a useful tool for traders looking to execute large orders with minimal market impact. By splitting large orders into smaller pieces and keeping the bulk of the order hidden, iceberg orders can reduce the likelihood of slippage while preserving anonymity and control. However, it's essential to use iceberg orders carefully and ensure that the visible portion of the order is reasonable compared to the overall order size.