Iceberg Order – Definition, Usage, Examples & Whales Secrets

Trading concepts

Iceberg Order

An iceberg order is a whales’ secret that they use to hide what they are buying or selling. It also helps them hide the exact size or value of the big orders. Big investors and large institutions use it as a tool to avoid unnecessary price fluctuations of the financial instruments. That means the iceberg order stabilizes the prices and performance of the stock markets. 

Are you wondering about what the iceberg order is? And how is it a whales’ secret? Then today’s post is going to help you significantly. 

Iceberg order definition

Iceberg order can be defined as one large buying or selling order that is purposefully divided into multiple smaller orders. It is also known as whales’ secret because they use it to hide things like the exact size or value of the order.

Iceberg order explained

As we all know, supply and demand drive stock markets. In simple words, the prices rise or fall because of the magnitude of supply or demand. That means, stock prices tend to rise when demand is high. Conversely, prices begin to decline when the supply increases. We can easily understand the iceberg order by keeping the effects of supply and demand in mind.

So, we can say that large bulk buy or sell orders cause prices to go substantially higher or lower. When a large order is placed, prices suddenly rise. Conversely, when a large sell order is placed, prices suddenly decline. In short, large orders substantially affect supply and demand in the market. Afterward, the prices dramatically rise and decline because of higher supply or demand. So, what is the role of iceberg order? 

The role of the iceberg order is that it helps large institutions improve their portfolios by selling or buying financial instruments without tipping off the other traders. How does it happen? It happens because one large order divided into multiple small orders doesn’t cause panic in the market. In fact, smaller buy orders or sell orders disguise the extent of increasing buy or sell orders. When traders don’t see the buying or selling pressure, the prices remain almost stable. Thus, large institutions looking to buy securities at lower prices keep prices stable. They complete their buying at lower prices. On the other hand, institutions looking to sell also do the same. They sell at higher prices and make significant gains.

In short, iceberg orders are whales’ secrets. They use this tactic to hide from other traders what they are up to. Thus they keep the supply and demand under control. That controlled supply and demand then keeps prices stable. That is the whales’ secret and that is how large institutions use iceberg order to their advantage. 

Moreover, if you think about the name iceberg order, it conveys the logic for placing multiple small orders. Other traders are only able to see a small part of the large order just like the tip of the iceberg easily visible. We can’t see the large part of the iceberg hidden beneath the water. Furthermore, iceberg orders are only associated with large institutions because small traders don’t have huge capital that can substantially affect markets. 

Iceberg order example

Let’s try to understand iceberg order using an example. Suppose that a large institution wants to buy stocks of a company worth $1 billion. The stock price of that particular company is $20. Now, that large institution will use iceberg orders instead of a single bulk order. It will ask the broker to place 50 orders of 20,000 shares. In this way, the stock price of that company will not rise significantly. Thus, the whale will complete buying of shares at the lowest possible price. 

How can you identify iceberg order? 

You can identify iceberg orders using Level 2 Quotes. Level 2 Quotes is a complex dashboard that displays the flow of orders in the market. It shows bid and ask prices. You can analyze how buyers or sellers are placing orders. Therefore, you can use Level 2 data to determine whether to buy or sell stocks. Similarly, you can use it to identify iceberg orders. However, you need to focus on fairly large orders placed by one institution. For example, you see on the Level 2 dashboard that a company named XYZ is placing buy orders of 1000 shares in a company. You observe that XYZ is placing orders as soon as the previous order is fulfilled. That series of small orders indicates the iceberg order used by XYZ.

How to trade using an iceberg order? 

Large institutions know that their huge trades significantly affect markets. Therefore, they capitalize on the iceberg order tactic. They do everything to hide their trades. Although it is difficult to spot iceberg orders, it is worth it. You can take full advantage of it because by identifying it, you can understand where the smart money is going. It helps you in understanding that constantly reloading orders will give support or resistance. Moreover, you can understand that the prices will not dip too much in such cases. That’s how you can take advantage of identifying iceberg orders in the market. 

The wrap-up

An iceberg order is a very important whale’s secret. It means placing multiple small orders instead of placing one bulk order. Iceberg order helps large financial institutions significantly improve their portfolios by buying or selling at the best possible price. These institutions know that large orders significantly affect markets. They push prices in one way or the other. Conversely, small orders don’t affect markets on a large scale. Therefore, they keep prices stable by splitting one order into multiple small orders. 

Moreover, it is crucial for small traders to identify iceberg orders although it is fairly difficult. However, you can identify iceberg orders by looking at Level 2 Quotes. Identification of iceberg orders helps you to understand where the smart money is going. You can follow that path to make significant gains. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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