In recent years, electronic trading platforms have added the capability to place iceberg orders. What are they, and are they helpful to the average retail trader?
The reference to iceberg stems from the idea that the tip of the iceberg is the only visible part of a large mass of ice emerging from a body of water. Accordingly, the term iceberg order is defined as the practice of breaking up an order to buy or sell a large quantity of contracts into multiple smaller orders through the use of automated software.
As the futures markets moved from open-outcry execution to electronic, this order type has become more popular. This is because traders — retail or commercial — who trade large quantities typically prefer to mask the true volume from view of others. In other words, iceberg orders enable the public to see only a small portion of the actual order at a time.
Most futures trading platforms offer the ability to view DOM (depth of market) data in which it is possible to observe the working buy limit and sell limit orders of other traders. These working orders on display are often referred to as the “book.” Some traders monitor the trading book for large-quantity orders. In theory, large buy orders indicate the market may be inclined to move higher, or at least it suggests that large players believe it will. These inferences, whether right or wrong, can influence prices and possibly prevent the entity placing the large quantity to be filled at their desired price. As a result, funds and institutions placing sizable orders have incentive to mask the true quantity of their order. Simply put, those using iceberg orders do so under the belief that it will reduce the impact the order has on price movement as it is absorbed into the market.