Iceberg Orders

You can execute different orders on the crypto market, and also on the regular exchanges. Limit orders, stop-loss orders, direct orders, etc. An iceberg order is slightly more complex and is all lucrative if you work with large amounts. In this article we will focus on what an iceberg order is, why you should consider using this order type and for whom it is interesting.

Iceberg orders #

An iceberg order is especially interesting for traders who deal with large sums of money, because it is a great way to buy or sell large amounts of cryptocurrencies.

When investors move large investments on the (crypto) market, this will stand out. They will cause shifts, which results in that large investments usually do not turn out as positively as initially thought.

Imagine you buy 50,000 Bitcoin (BTC) in one go. This trade stands out in the order books, unintentionally attracting the attention of other investors. This can lead to a disruption of the market, resulting in a possible decline in the value of the currency.

By dividing that large order into several small orders, the transaction will not stand out as much. A series of smaller trades don’t stand out in the market. If someone does notice, then the transaction has already been carried out.

This is why this order type was given the name iceberg, because investors only see the tip of the iceberg. The rest of the big mountain is underwater, invisible to the rest of the market.

Who uses iceberg orders? #

If you as a private individual occasionally shift a few tens back and forth, then this is not an interesting matter for you. Iceberg orders are usually used for large investors or market makers. Market makers are firms (or individuals) who buy and sell prices in the hope of making a profit on the spread between fluctuating prices. You will encounter these large amounts with crypto enthusiasts, but institutional investors, they really make the most use of this.

Because these investors trade with large sums of money, this can have a huge impact on the market. However, you can find the orders in the order books, but then you have to know what to look out for. A small percentage of the total order volume can be found in the level 2 order books. In the crypto space, this is the place where bids, demand, price, volume and a timestamp are collected. It’s a large data collection with all useful information about trades.

Why use iceberg orders? #

Iceberg orders can prevent panic in the market. Usually, investors get help in executing these orders, because it has to be executed on the basis of a logistical plan. If you do not do this, chaos will take place and there is a chance that you will still go wrong.

The broker executes the trades until the schedule is completed by executing the last order. Suppose you want to buy 10,000 BTC, then the broker divides this order into small pieces. The schedule could look like this:

1. Buy 2500 BTC as first order;
2. Buy 3000 BTC as second order;
3. Buy 2000 BTC as third order;
4. Buy 2500 BTC as last order.

Let’s say there is a large retirement mutual fund and they want to invest $6 million in a certain cryptocurrency. If they were to bring this out as news, the prices would skyrocket, making it no longer beneficial to invest. To avoid these disruptions, they split large order into parts of about $500k.

Impact costs #

In addition to the above examples, you also have to deal with impact cost. The impact costs represent the difference between the trading price compared to the price that was current when the order was placed. This sounds a bit complex, so here’s an example.

Suppose you buy 1000 Ethereum (ETH) at Ξ1 and the final execution price was Ξ1.05, then the impact costs are Ξ0.05 x 1000: Ξ50.

The larger the order, the higher the impact costs often are. As an institutional investor, the costs are often also included in the broker’s rate, the transaction costs, etc. By placing an iceberg order you avoid the costs completely or you seriously dampen them.

Iceberg orders are therefore aimed at keeping the market calm. Breaking down the large orders keeps institutional investors off the radar and that’s exactly their goal. This allows them to execute their orders at the desired price. When buying or selling large amounts of crypto, the last thing you want is to inflate the price of a currency due to buying pressure from other investors.