Iceberg Order

An iceberg order is a technique in financial trading where a trader or an investor purchases or sells a significant amount of securities or financial assets and splits them into multiple smaller units. It aids in concealing the actual order size and is beneficial for lowering the impact cost.

In this order type, the smaller units, also known as legs, are sent to the exchange only after the previous leg is fully executed. This strategy is generally used by institutional investors who wish to prevent the market from becoming volatile while engaging in trades involving a substantial amount of securities.

• An iceberg order is a financial trading strategy that involves an investor buying or selling a large number of securities or financial assets and dividing them into smaller units.
• It is effective for reducing the impact cost and assists in hiding the actual order size.
• Institutional investors usually use this approach when they want to avoid market volatility while conducting trades involving a significant amount of stocks.
• However, since each smaller unit requires payment for brokerage, this order includes additional brokerage charges. Furthermore, they are available only for sizable orders.

An iceberg order is a type of financial trading strategy that divides larger value orders into smaller units. This process ensures that the large orders are concealed in the market depth bids and offers. It also aids in lowering the impact cost of the trade.

Impact cost is the difference in the amount between the asset's price at the time the order was placed and the actual traded price. The impact cost increases with the order size. Traders and investors holding large order values lose significantly more money due to the impact costs.

In this order type, the large orders are split up into smaller orders or legs. Only the first leg is first placed on the exchange, which allows a peek just into the tip of the iceberg. The next leg of the original order is placed after the previous one is completed. Finally, the process continues until the entire desired quantity is traded.

The methods of identifying this order are:

1. A series of repeated orders at a single price point may aid in an iceberg order detection.
2. When security displays an unusual trading volume without a proportionate change in the security price, it may indicate this order.
3. If the market information reveals continuous replenishment of orders at a specific price level, it may signify the occurrence of this order.
4. Algorithms and advanced trading platforms may analyze market data trends and assist in iceberg order detection.

Investors and traders who wish to place this order must look for trading platforms that provide Direct Market Access (DMA). In the trading platform, they must generate a dealing ticket and move to the market order type. Then, the traders must adjust the order limits and set them to the iceberg. Finally, they may place the order. The iceberg order trading can provide value from the concealed liquidity of the trade. Since the order is hidden, the market participants do not get to know the extent of the whole order.

Let us study the following iceberg order examples to understand the order type:

Example #1

Suppose Ryan is an institutional investor who wants to buy 10,000 shares of a particular stock. However, if he placed the order in a single lot, it would lead to market volatility, and there could be a substantial impact cost in this case. Thus, instead of revealing the entire order size, Ryan chose to reveal only 500 shares at a time. Once he bought those 500 shares, another 500 shares were released. The process continued until Ryan purchased the entire 10,000 shares. This is an iceberg order example.

Example #2

Zerodha, an online brokerage in India, has recently introduced iceberg orders on their application. It aims to break down large orders into smaller legs, where each order is executed only after the execution of the previous leg is completed. The Zerodha CEO suggested that active investors lose a significant amount to impact costs, especially with large trades. He also stated that traders can set the validity of all order types in minutes. This process may aid the investors who want to cancel the orders if they are not executed within a specific time.

Some advantages of an iceberg order trading include the following:

1. This order lowers the impact cost by breaking down the large order into smaller and less noticeable orders. Additionally, it aids in preventing hoarding or panic in the market that may arise from large orders.
2. These orders can enable the occurrence of large trades without disclosing the true intentions in the market. Moreover, they are beneficial for mergers and acquisitions.
3. The orders can aid in lowering market volatility, which helps in managing liquidity in the market.
4. They may help investors and traders comply with regulations where the protocols have restrictions on the order size that can be placed at once.

The disadvantages are:

1. This order comes with additional brokerage as every smaller unit requires brokerage payment.
2. They are only available for large order sizes.

The differences between the two are as follows:

Iceberg Order:

1. This order enables traders and investors to hide the complete size of the orders.
2. The order is broken down into multiple smaller orders, which aids in concealing the actual order volume from other participants in the market.
3. This order displays only a tiny portion of the entire order.

Basket Order:

1. A basket order is a group of several securities with a similar theme. It comprises a collection of assets sharing specific criteria.
2. This order purchases or sells several securities simultaneously in a basket.
3. Usually, retail traders opt for basket orders. However, anyone can choose to hold a basket of financial securities.

The differences between the two are as follows:

Iceberg Order:

1. This order is a technique of concealing the size of a large order by splitting it into many small orders.
2. It is employed to prevent the prices of securities from changing sharply if the market participants get to know the actual order size.
3. This order reduces any urgency for buying or selling specific securities, which leads to little or no impact cost.

Hidden Order:

1. A hidden order is an order type in security trading that instructs a trader to split up a large order into several small segments. These segments are then sent to the exchanges as individual orders.
2. The segments are minute, and they do not have any impact on the market rates.
3. This strategy is employed by investors who seek to purchase or sell securities anonymously.

This article has been a guide to what is an Iceberg Order. We explain its examples, comparison with basket & hidden orders, how to identify & place it, & advantages. You may also find some useful articles here –

• Market-On-Open Order
• Stop-Loss Order
• Immediate Or Cancel Order