What is an Iceberg Order
Iceberg orders are large single orders that have been divided into smaller limit orders, usually through the use of an automated program, for the purpose of hiding the actual order quantity. The term "iceberg" comes from the fact that the visible lots are just the "tip of the iceberg" given the greater number of limit orders ready to be placed.
BREAKING DOWN Iceberg Order
Many institutional investors use iceberg orders to buy and sell large amounts of securities for their portfolios without tipping off the market. Only a small portion of their entire order is visible on Level 2 order books at any given time. By masking large order sizes, the iceberg order reduces the price movements caused by substantial changes in a stock's supply and demand.
For example, a large institutional investor may want to avoid placing a large sell order that could cause panic. A series of smaller limit sell orders may be more palatable and disguise the extent selling pressure. On the other hand, an institutional investor looking to buy shares at the lowest possible price may want to avoid placing a large buy order that day traders could see and bid up the stock.
Identifying Iceberg Orders
Traders can identify iceberg orders by looking for a series of limit orders coming from a single market maker that constantly seems to reappear. For example, an institutional investor might break an order to buy one million shares into ten different orders for 100,000 shares each. Traders have to watch closely to pick up on the pattern and recognize that these orders are being filled in real-time.
Traders looking to capitalize on these dynamics might step in and buy shares just above these levels, knowing that there's strong support from the iceberg order, creating an opportunity for scalping profits. In other words, the iceberg order(s) may serve as reliable areas of support and resistance that can be considered in the context of other technical indicators.
For example, a day trader may notice high levels of selling volume at a certain price. They may then look at the Level 2 order book and see that most of this volume is coming from a series of similarly-sized sell orders from the same market maker. Since this could be the sign of an iceberg order, the day trader may decide to short sell the stock due to the strong selling pressure from the constant stream of limit sell orders.