To avoid anticipatory action from other market participants, investors submitting large volume orders for stocks, warrants, futures, and options may wish to conceal the full size of their order. The Iceberg/Reserve attribute, when used in conjunction with the Display Size field, allows you to submit large volume orders to the market in increments while publicly displaying only a portion of the total order size.
Instead of displaying your entire order (which could have a significant market impact), you display a relatively small order. For example, suppose you want to conceal the fact that you’re purchasing 2,000 shares of a stock, so you enter an iceberg order with a limit price of $10.00 and 100 shares displayed.
When your 100-share bid is met, another 100 shares are automatically reloaded until you have purchased all 2,000 shares. It’s called an iceberg order because, like an iceberg’s peak, you can only see a fraction of its true size.
Consider the “tip” of the iceberg below to be a 100-share bid, when in reality there are 10,000 shares ready to reload behind that bid.
What is an Iceberg Order?
An iceberg order is a purchase or sale of a large quantity of financial security that is broken up into several smaller orders rather than being entered as a single large order. This method of purchasing or selling securities is referred to as an “iceberg” because each small order represents the tip of the iceberg.
Iceberg orders are commonly used by large, institutional traders because they buy and sell securities in extremely large quantities. When trading stocks or other financial securities, they use iceberg orders as a trading technique to help them get the best possible buy or sell price.
Why Should You Pay Attention to Iceberg Orders?
This order type is used by well-capitalized smart money traders because they cannot simply place a direct limit order for 100,000 shares. It would cause the market price to fall and even cause momentum traders to jump ahead of them. They are aware that their orders have an impact on the market, so they have taken precautions to conceal them.
It stands to reason that if you can identify possible iceberg orders, you can follow in the footsteps of smart money. Knowing that there could be a large order in the market can provide support or resistance.
If you see an iceberg order bidding 100 shares at $25.00 and constantly reloading, you can treat it as a support level because you know the price can’t fall too far below its bid price as long as that iceberg order remains.
Of course, this is an unfair characterization, because the truly smart money will go to great lengths to ensure that you don’t understand where their orders are or how much they want to trade.
How do Iceberg Orders work?
Iceberg orders are preferred by traders who deal in large quantities of financial securities. The large volume of trading they must execute has the potential to significantly change the current market price of security because many buy or sell orders increase the pressure of demand or supply in the market.
A single order to purchase, say, 50,000 shares of a single stock, is likely to represent a significant increase in the stock’s level of demand. As a result, the stock’s price will almost certainly rise. Similarly, an order to sell 50,000 shares of a stock is willing to decrease the stock price.
Iceberg orders are used by large traders to execute the total amount of buying or selling that they want to do in relatively small incremental steps. They hope that by doing so, their orders will not cause the trading volume to move in their favor and that they will be able to complete all of their buys and sells at or near their desired price.
Another issue that large, organizational traders face when attempting to execute large orders is that they may not be able to gain the desired price. If they place a single large order, the order quantity becomes visible to the rest of the market players.
If a large number of other traders notice that an institutional trader is attempting to purchase a large number of shares of a particular stock, they may look to enter the market and purchase a large number of shares themselves. The additional buying pressure may significantly increase the stock’s price, forcing the institutional trader to pay a higher price for their shares than they desired.
How to Find Iceberg Orders?
The key feature of an iceberg order is that the same bid or offer instantly “reloads” after it is lifted. For instance, suppose you’re watching the hypothetical ticker ABC, which is currently bid at $9.90 and offered at $9.95.
You observe that EDGX consistently has a resting order at $9.80 for 1,000 shares. You can see that once traders hit that bid, it is immediately reloaded.
In other words, whenever someone sells to the trader on EGDX, he keeps sending out the same order. There’s a good chance that this is just the tip of the iceberg.
Why Is It Difficult to Find Icebergs?
Order flow analysis in 2021 will be extremely difficult. Even retail traders have access to sophisticated tools to conceal their true trading intentions, implying that the smartest money is most likely employing tactics and tricks that we are unaware of.
As a result, as trading technology has advanced, the signal-to-noise ratio in the order flow analysis has decreased. You’ll read several false signals if you don’t have a glance and trained instincts. This is especially true in equity markets, where order flow is severely fragmented due to the popularity of dark pools and dozens of exchanges.
In comparison, the major futures contracts trade on a consolidated exchange and have high liquidity, which reduces the necessity of dark pools. As an example, open an order ticket on any direct market access platform. Consider not only the number of venues to which you can route your trade but also the number of unique ways to design your order.
The iceberg order is usually only useful if the market lacks the liquidity to handle your order without causing a significant impact on the price. Identifying potential icebergs, on the other hand, are extremely valuable and is at the heart of many trading strategies