An iceberg order is a large limit order that shows only a small part of its total size in the public order book and keeps the rest hidden. When the visible part, called the peak or display quantity, is filled, the exchange automatically displays another slice from the hidden reserve, and this repeats until the whole order is done or cancelled. The name comes from the image of an iceberg, most of which lies below the waterline.
The order type exists so that an institutional investor or other large trader can work size in a lit market without advertising it. Many exchanges offer it as a native order type, also known as a reserve order, and brokers offer synthetic versions through their algorithms. On the Indian exchanges the same feature is known as disclosed quantity.
How an iceberg order works
The trader sets a total quantity, a limit price and a display quantity. Only the display quantity is published in the market data feed. Suppose a fund wants to buy 100,000 shares at 50.00 and sets a display quantity of 5,000. The book shows a bid of 5,000 at 50.00. When a seller fills the visible slice, the matching engine releases a further 5,000 from the reserve, and it can do so up to twenty times before the order is complete.
Two priority rules are common to most markets. First, hidden quantity ranks behind all displayed orders at the same price, whatever time it was entered. Second, each new slice is treated as a fresh order for time priority, so it joins the back of the queue at its price. An incoming order larger than the visible slice will, on most venues, trade against all displayed quantity at that price first and then against the hidden reserve. Some venues let the display size vary at random within a range to make the refills harder to spot.
Why traders use them
A visible bid for 100,000 shares in a stock that normally shows a few thousand at each price is information. Other participants may raise their own bids to get ahead of it, or sellers may withdraw and wait for a higher price. Either response moves the price against the large buyer, a cost known as market impact. By showing little, the iceberg reduces this signalling while still resting in the book as a passive order.
The alternatives each have drawbacks. Sending the order to one of the dark pools hides it completely but gives no certainty of finding the other side. Negotiating a block trade needs a willing counterparty. Slicing the order over time with an execution strategy that tracks the volume-weighted average price or the time-weighted average price spreads the impact but takes on the risk that the price drifts away. In practice these methods are combined, and an execution algorithm may place iceberg child orders as one of its tactics.
Detection and limits
Icebergs are hidden but not invisible. When trades at one price keep printing for more than the displayed size and the quote refills at once, the pattern points to a reserve. Firms engaged in high-frequency trading, and other participants, run models on tick data to estimate hidden liquidity from such refills, and they may trade ahead of the remaining quantity or lean against it. On venues that allow fully hidden orders, small probing orders are also used to search for hidden size inside the spread.
The loss of time priority on each refill is the main cost. In a busy stock a queue forms at each price, and a slice that keeps going to the back may trade slowly. A display quantity that is too small draws out the execution, and one that is too large gives away the order. Fees can differ as well, since some venues charge more for executions against hidden quantity than against displayed quantity.
Regulation
Iceberg orders are legal and are distinct from manipulative practices such as spoofing, in which visible orders are placed with no intention of trading. An iceberg does the opposite: it conceals a real intention to trade. Regulators nevertheless limit hidden liquidity, because public quotes are the basis of price discovery. In the European Union, MiFID II requires pre-trade transparency for orders on trading venues and permits reserve orders under a waiver for orders held in a venue's order management facility, subject to minimum size conditions. Exchanges set their own minimum display and total sizes. In most markets the order must carry a limit price, since a market order would not rest in the book.