An “iceberg order” is a type of order that investors and traders can place in the stock market. This type of order involves splitting a large order into smaller parts to hide the actual order quantity. The strategy is named after the “tip of the iceberg” phenomenon, as only a small part of the total order is visible to the market at any given time.
The main purpose of an iceberg order is to avoid causing significant market impact. Large orders can often impact the price of a security because they suggest a strong interest to buy or sell. By using an iceberg order, an investor can aim to buy or sell a large quantity of shares without substantially influencing the market price.
Iceberg orders are commonly used by institutional investors and traders who need to deal in large volumes of securities. The order is entered into the system with a display (visible) quantity and a hidden quantity. As the visible quantity is executed, more of the hidden quantity is revealed in chunks, maintaining the illusion of a smaller trade.
However, while iceberg orders can help limit market impact, they do not completely eliminate it. Sophisticated market participants and algorithms can sometimes identify iceberg orders by analyzing patterns in order executions, and could potentially act on this information.
Lastly, it’s worth noting that the use of iceberg orders and their visibility to other market participants can vary based on specific market rules and the type of trading platform or venue being used.