Iceberg order
What is Iceberg order in stock market and how does it work?
An Iceberg Order is a special type of order that is primarily used to trade large quantities of a financial security. In this case, an order having a huge volume is broken down into multiple orders of smaller quantity. These small orders are then sequentially sent to the Stock Exchange, where the new order is only sent when the previous order has been fulfilled.
This way, the trader is able to hide the actual size of the order. So, it becomes difficult for the other market participants to figure out the exact quantity of securities that are available at any given price. This helps in reducing the Impact Cost that happens because of large orders.
Why use Iceberg orders?
Let us understand the need for Iceberg Orders by using an example. Suppose that the current market price of the stock is INR 450 and the Order Book of the stock looks like the data mentioned in the below table.
|
Order ID |
Buy quantity |
Buy Price |
Sell Price |
Sell quantity |
Order ID |
|
B1 |
50 |
448 |
450 |
300 |
S1 |
|
B2 |
250 |
447 |
451 |
100 |
S2 |
|
B3 |
400 |
445 |
453 |
600 |
S3 |
|
B4 |
550 |
444 |
456 |
800 |
S4 |
|
B5 |
500 |
441 |
460 |
1,000 |
S5 |
Suppose that a trader would like to purchase 5,000 shares from the market. In this case, there are not enough sellers available. If the trader tries to fulfill the order quickly, then the price of the stock will move upwards. So, there will be a significant compromise on the acquisition price.
In addition, when other traders see a buy/sell order with such a large quantity, then this can give an indication about the strong demand/supply for the stock. This will further drive up the price of the stock in this example.
An alternate solution for the trader would be to break the order of 5,000 shares into multiple orders of smaller quantity. After that, the trader could submit these smaller orders at regular intervals. This is where the Iceberg Order is helpful because it saves the manual effort and the smaller orders are automatically sent, when the previous orders get fulfilled.
Placing an Iceberg Limit Order
This order could be used for both Intraday trades and Delivery Trades. The following parameters are usually defined in an Iceberg Order, when it is being submitted to the Stock Broker:
Total Quantity of the shares to be bought/sold
Price at which the trade should be executed
Number of tranches/legs
When the larger order is being broken down into smaller orders, then the size of the smaller order will depend on the total quantity and the number of legs/tranches defined by the trader.
Example: Suppose that the trader submits the following Iceberg sell order:
Sell 10,000 shares at INR 300, in 20 tranches.
In this case, the size of each tranche is: 10,000 / 20 = 500 shares. The first order that will be sent to the exchange is: Sell 500 shares at INR 300. When this order gets traded, then the Broker will send the next order of 500 shares at INR 300.
Handling of Iceberg orders
When using the Iceberg in Stock Market, it is not possible to select the order type as a Market Order. This is because the priority in a Market type order is to execute the trade quickly and no importance is given to the price at which the trade is executed.
In case of Iceberg orders, if multiple market orders (of smaller quantity) are sent one after the other, then the market price could move significantly. That is why, the Iceberg feature is used along with a Limit Order or a Stoploss Order. In the Limit and Stoploss orders, the trader would need to define a clear price at which the trade should be executed.
Trading Ice Berg Orders
When the order is submitted to the Broker, then the first tranche/leg is sent to the Stock Exchange immediately. After that, the Broker waits for the order to get traded on the exchange. Once the trade is executed, then the Broker sends the next order to the Exchange. This process is repeated till the entire order gets fulfilled or till the time the order is cancelled.
The Iceberg Order does not guarantee that the large sized order will be completely fulfilled. But it provides a good opportunity for the trader to focus on the price, when a large quantity of shares is being traded.
At any time, only 1 tranche/leg of the order will be visible to the other market participants. So, the major benefit of Iceberg orders is that it masks the total quantity of shares that a trader is willing to buy/sell.
Other conditions in Iceberg orders
Some Exchanges do not support this type of order directly and the Iceberg facility is provided by the Stock Broker to their clients. So, the rules and restrictions related to these orders are defined by the Broker. For example, a Broker might only provide this feature when the traded quantity is more than 50,000 shares.
Since a larger order has been broken down into smaller orders, many Brokers treat these orders separately for calculation of their Brokerage charges.
Besides hiding the intention of the trader, another benefit of Iceberg order is that it helps in placement of large orders for securities that have a Volume Freeze restriction. For example, the exchange might have defined the maximum number of shares that can be purchased in a single order, for a particular stock.
After the order has been submitted, it can be modified or cancelled at any time. It is not possible to edit the orders that have already been traded. But any changes made to the Iceberg order will be applicable to all the pending orders that have not yet traded.
Iceberg order and Disclosed quantity
The Disclosed Quantity concept in an order offers a very similar facility like the Iceberg Order in share market. When using the Disclosed Quantity, the trader could choose to reveal only a part of the entire order to the market.
For example, suppose that a trader submits an order to buy 40,000 shares at INR 150 and he/she selects the Disclosed Quantity as 20,000 shares. In this case, the Market Depth of the stock will display a demand of only 20,000 shares at INR 150.
The order is sent from the Broker to the Stock Exchange for the entire 40,000 shares and the masking is done by the Stock Exchange. So, the Exchange usually defines the rules and restrictions related to the Disclosed Quantity.
Whereas, if an Iceberg Buy Order had been used in the above example, then a smaller order would have been sent by the Broker to the Exchange. The Stock Exchange (and market participants) will never know that the trader is willing to trade a total of 40,000 shares.
So, the masking is done by the Broker in the case of this Buy Iceberg Order. Besides Iceberg, some Brokers offer the Order Slicing feature to their clients. In other situations, a trader could also use IOC orders for trading large quantity of shares.
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