The iceberg order is defined
AtoZ Markets – An iceberg is an order that conceals the actual size of the order. Recently, these orders are becoming more and more common because there is no restriction for access.
Understanding iceberg orders further
So, if you have a massive order, you may opt to show that it is relatively small. For example, let's say that an individual is buying 5,000 shares from a stock. He can display that he is only buying a total of 500 shares. After the bid hits 500 shares, the next set of 500 shares will automatically reload until the reload exhausts the 5,000 shares.
Why the term iceberg?
There is an idiom that goes like "the tip of the iceberg." It means that what we see is just a small portion of something more massive. Let's say a person is riding a boat and sees an iceberg; we never really know that whole iceberg's actual size unless we dive deep below the water to see it personally.
The same is valid with the example above. The 500 shares are just the "tip" of the whole iceberg, which are 5,000 shares.
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How to identify tricky iceberg orders
There is a significant indication of iceberg orders. There is a strong possibility of an iceberg order when a standard order reloads right away after the other one goes.
However, this is very tricky since many traders resort to different methods to hide their trading tactics, and we are not even aware that such things exist. Due to modern technology, if one does not have a very keen eye, one might read a false signal. It is mostly in equity markets where dark pools are prevalent. However, if a significant futures trading is very liquid and there is substantial consolidation in the exchange, there is no need to use a dark pool.
If a market can handle a massive order without pricing impact, then an iceberg order might not be beneficial. However, spotting an iceberg order is an excellent advantage for any trader since smart money is always a remarkable trace to follow when making critical trading decisions.
How different iceberg orders work
The asset class, brokers, and exchange can impact how an iceberg order works. Iceberg orders have two types. They can either be native or synthetic. People who trade with native iceberg orders can directly place orders and exchange. On the other hand, a person who deals with a synthetic iceberg order sends instructions to the broker to reload the order as soon as it gets hit.
Why should we be concerned?
A smart money trader will not merely place a massive amount of orders right away. It will shake the market pricing— it will go up and down. Massive orders will react in the market, so these traders have to find ways to conceal their actions. Traders would most likely copy the footsteps of the smart money's direction. If traders know where that direction is, the market will either give support or resistance.
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