An Iceberg order, also known as a hidden order, is a strategic tool in trading that allows large limit orders to be placed without causing market impact. This order type is particularly useful for traders looking to execute large trades without revealing the full order size to the market, thus maintaining a stable market price.
To use this order type, apart from a limit price, two different parameters must be set:
Display Quantity: This is the portion of the order that is visible to the market. The display size is set by you and represents the amount of your order that will be displayed in the order book.
The quantity cannot be smaller than the order minimum for the trading pair, or be smaller than 1/15th of the total order size.
Order Quantity: This is the total amount of the order, including both the display size and the hidden portion. The hidden portion is the quantity minus the display size and represents the remaining amount of your order that will not be displayed in the order book.
When an Iceberg order is placed, only the display size is shown in the order book snapshot. As the display size gets filled, more of the hidden portion is revealed in increments of the display size. This process continues until the entire order is filled, allowing for large trades to be executed without significantly impacting the market price.
Why use an Iceberg Order
Iceberg orders are especially useful in markets where large orders can significantly impact the price. They allow traders to execute large trades without revealing the full order size, which can help to prevent substantial price movements caused by being visible on the order book.
For instance, if you want to buy a large amount of a cryptocurrency, you could use an Iceberg order to gradually execute your order without causing a sharp price increase. This allows you to acquire the cryptocurrency at a more stable price than if you were to place the entire order at once.
It is important to note that your Iceberg order is not directly tied to a position (not reduce only) but is an independent order and if you exit a position in an alternate way the Iceberg order must also be manually canceled.
Iceberg orders that execute immediately are treated as taker orders and will incur taker fees.
In conclusion, the purpose of an Iceberg order is to execute large trades without causing significant market impact. This strategy is a key part of risk management in trading, particularly for those dealing with large order sizes.
Let's say the current price of ETH is $2000 and you want to buy 10 ETH. However, you don't want to cause a significant price increase by placing such a large order all at once. So, you set an Iceberg order with a display size of 1 ETH and a total quantity of 10 ETH. The remaining 9 ETH is your hidden portion.
In the order book, only your display size of 1 ETH at $2000 is visible to the market. Other traders can see and interact with this order, but they cannot see the remaining 9 ETH of your order.
As your display size of 1 ETH gets filled, another 1 ETH from your hidden portion is revealed in the order book at the same price of $2000. This process continues, with 1 ETH from your hidden portion being revealed each time your display size is filled.