Iceberg orders are an execution tactic where a larger market order is chunked out into smaller orders and slowly fed to the market at specific price levels to try and reduce market impact.
Institutional traders often use them to mask the full size of the position they want to enter or exit.
These are extremely common in futures trading but are also extensively used in equities and options markets.
Most people do not even know that these orders exist, but you can detect them by watching level 2 and the time and sales of an instrument.
These large orders can help show where larger traders are positioning and potentially show how they think the market is going.
Contents
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- Basics of Iceberg Order
- How Iceberg Orders Work
- Identifying Iceberg Orders
- Trading an Iceberg Order
- Trade Examples
- Conclusion
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Basics of Iceberg Order
Icebergs, or refreshing orders, are when a large trader wants to get into or out of a position at a specific price or price range.
They use icebergs to conceal just how large their position is and when they do not care how long the order takes to fill.
If someone were to fill a 1 million share lot on Nvidia, they would never get the price they were looking for.
It would drown out all the resting orders and drive the price up.
If they break it down to 100 to 500 lot trades, no one will be tipped off to the position, and they will fill the entire position at the price they want.
Lastly, these orders help to prevent a trade from getting front-run (when people see an order and jump in ahead of it).
If you saw that same 1,000,000 share lot sitting on the bid for Nvidia, almost everyone would know that someone wants to get a long, large position and would start placing their orders in front of it.
Icebergs are a valuable tool for larger trading firms and institutional investors because they allow a position to get filled while simultaneously controlling the risk of price fluctuations.
How Iceberg Orders Work
Now that you know the basics of an Iceberg order, let’s look at how they work and how to identify them when trading.
We already know that Icebergs are very large orders chunked out into smaller ones, but how do those orders get executed?
Let’s take that million share example from above again.
If they broke that down into 1,000 share chunks, filling the position would take 1,000 orders.
If it was dumped all on the bid at the same time, it would still show up at full size, so it would be in the same position as just 1 1,000,000 share order.
Instead, what happens is that the order is hidden, so after the first order gets filled, the second order pops up on the bid to take its place.
This is why it’s called an iceberg or refreshing order.
You can only see the top; the rest is hiding, waiting to be hit.
Slowly, the orders started to fill over the next several hours or days, and most people missed that all that size was filled.
Identifying Iceberg Orders
As we started in the intro, to detect iceberg orders in trading, you must observe level 2 and the time and sales of an instrument. Iceberg’s telltale sign is the repeatable size continually hitting a price level.
These limit orders will continually pop up on level 2 as coming from the same market maker, and then once you see the size trade on the time and sales, you will see the same size pop back up by the same market maker again.
Tools to display where iceberg orders rest are starting to arrive on the market on more complex trading platforms like Bookmap, but these are far from foolproof.
Another possible tipoff is that there is a refreshing order at a price by looking at a chart and a volume profile of a stock.
If there is an area or price level that price keeps bouncing off of and volume keeps picking up, there may be a refreshing order there.
When the price is around that level again, keep an eye on level 2, time, and sales to see if you see someone filling size over and over again.
Below is an example from Tesla on an hourly chart of where a potential iceberg is. Of course, you would want to go to the tape and level 2 to confirm.
Trading An Iceberg Order
Now that we are armed with what an iceberg order is and how to identify it on the chart and tape let’s look at how to potentially trade it.
When you think you have identified an iceberg, three main trades and dozens of others can be taken.
The first is the continuation trade.
I must be under significant pressure from the other side to fill the size that is often associated with an iceberg order.
This means that if you want to fill a long position, you need many people to sell to you.
Due to this, it’s often the case that once the owner of the iceberg has filled their size, the price dips below their entry, and sellers realize that the order is no longer there.
So a common trade is to wait for a break of the refreshing order’s price level and trade that price will continue to push through it for a few percentage points.
This should be a quick trade, as you only have momentum on your side.
The second trade can be placed with either options or the underlying itself, which is to trade in the direction of the potential iceberg.
If you have someone filling size off the bid, it means someone is buying the stock or future and is expecting it to move up.
To trade this, you can enter the stock at around the same price as the refreshing order and just be prepared to wait for the stock to move.
As with all trading, you should have a stop loss or a price where you no longer want to be in the trade.
Options simplify this by having a fixed risk profile, especially if using LEAPS.
To place this trade with LEAPS, look at the month or slightly out of the money and buy as much time as you can afford.
This effectively is a stock replacement strategy.
The final trade is a little less common but still can work well, and this is a range trade.
It is looking for the iceberg to still be there, and to play that price will continue to hover around it.
To trade this, Iron Condors or Butterflies work best to let theta decay work in your favor.
This is not a recommended strategy but a way to trade refreshing orders.
Trade Examples
Below is an example of the trades mentioned above but on the Tesla chart from earlier.
Price continually bounced off of the 171-172 level for several weeks.
If you look to the right, a large volume ledge formed on the volume profile (where there is an area of large volume and impedimental next to it, there is an area of low volume), showing that someone was trying to get filled.
There was a lack of interest below it.
When that buyer was finally done, the price dropped like a stone and rocketed up through it to a high of 190+ a few sessions later.
All three of these trades could have been executed on this chart.
First is the condor options.
As the price continues to bounce off the price, it indicates that the buyer is still there.
Weekly condors around the 172-175 level would have worked well.
Next was the continuation trade.
When the price finally broke through that level, it gave a solid 5-7 point trade at the refreshing bid level.
This trade lasted an hour and gave a short window to get out of it.
Finally, there is the long trade. If you had just held the shares of Tesla from around the iceberg level of 171, you would have seldom been underwater and would have ended with a profit of roughly 20 points from bottom to top.
You could also still hold the trade-on expectations that whoever was filling at the bottom was looking for more.
But taking profit is never a bad thing.
Conclusion
Iceberg orders are a common way for larger traders to fill size on the market.
They are extremely effective for the market makers and can also be extremely profitable for the traders who can spot them.
Learning to read level 2, time, and sales accurately can help you spot these and trade with these whales.
Whether it is with the stock itself, futures, or options, Iceberg orders can be a great tipoff that a move is coming; it just takes practice to spot them.
We hope you enjoyed this article on iceberg orders.
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Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Original source: https://optionstradingiq.com/iceberg-orders/