What is an Iceberg Order, How Does It Work, and How Do You Use It?

Key takeaways:

• An iceberg order is a huge-sized transaction order divided into small packets that pass through the market effectively.

• Without an iceberg order, processing an extremely high-value order could raise panic within any financial market and cause an imbalance.

Introduction

In any type of financial market, participants may feel panic due to various reasons. While experiencing such a panic, a trader might make an ill-informed decision and later regret it. But in a worst-case scenario, panic caused by any indicator or activity could throw the whole market into a frenzy. So to avoid this kind of situation, an iceberg order exists.

The situation of using an “iceberg order” is similar to the saying “the tip of the iceberg.” Similar to the saying that suggests something small hides a huge implication, iceberg orders also conceal the true size of transactions for the greater good of all market participants.

Let us take a deep dive into this topic to unearth what defines an iceberg order and how it works.

What is an Iceberg Order?

An iceberg order is a series of transactions that a market participant carefully executes while adhering to a logical and strategic plan.For purposes of simplification, we can understand an “iceberg order” as a big trading order that has been divided into several smaller chunks. Executing numerous small-value orders is far easier and more profitable than dumping a high-value order.

Example:

In terms of the cryptocurrency market, suppose you need to buy or sell 50,000 bitcoin in one go. The total value of such a transaction would stand out in the order books no matter what because every transaction is recorded on the blockchain. Furthermore, a transaction of this level would have an adverse effect on the broader crypto market.

To ease this situation so as not to trigger a market-wide panic among traders and investors alike, you need to divide that same order into smaller proportions. This way, other market participants pay no attention to your actual order as it goes through efficiently.

Why are iceberg orders important?

As any crypto market participant is aware, there has been a consistent bearish sentiment throughout 2022. This, in addition to the volatility and unpredictability, has made dabbling in crypto riskier than ever. Even popular cryptos that are generally considered safe for investing, like Bitcoin, have also dropped to disappointingly low values.

Bitcoin whales, a group of individuals holding a huge amount of BTC within their wallets, are awaiting market recovery to make a move. If such individuals buy or sell a large number of cryptocurrencies, they have the potential to significantly disrupt the market. Bitcoin whales and other significant parties are known to manipulate the market.

The pump and dump strategy is also known to influence any particular crypto’s price and thus affect the entire market. Behind every pump-and-dump scheme, there is a big player whom other small-scale traders choose to follow.

This is one of the most-used market manipulation techniques that can be handled with iceberg orders. Such an order cushions the effect of a bulk order.

Iceberg orders make it easier and safer for all market participants to trade. With iceberg orders, it is possible to prevent market manipulation and give both small-scale and large-scale traders an equal footing.

Especially in a market like crypto, where the tradable assets are inherently volatile, iceberg orders deal with large volumes so that small-scale traders do not get wiped out as collateral damage.

This is the role that iceberg or reverse orders play in protecting any financial market from manipulative individuals who place a huge trading order. Notably, iceberg orders help conceal the actual order size and thus maintain the balance between demand and supply in the crypto market.

How does an iceberg order work?

Any investor would prefer to avoid placing a big trading order that would surely cause fear in the market. So, they use iceberg orders willingly by placing numerous small-scale orders in the market at 1:1. This allows them to avoid upsetting market conditions while securely buying and selling large amounts of cryptocurrency.

The way an iceberg order works can be described with an example like the one below:

Anyone who wishes to secure their crypto assets before an unforeseen event such as a fork, blockchain migration, or launching the mainnet would need to sell a huge portion. On the other hand, before the bearish sentiments or signs of an exit scam appear, most investors tend to sell their substantial holdings as a way to stay safe.

After deciding on an exchange platform, an individual can proceed to place the order. Once received, the exchange automatically interprets it as an order containing small and hidden orders. This type of order is available as an option for one to choose, after which any large-scale order converts into smaller bits using a program.

The result is selling a huge order in multiples of 10 or even 5, depending on the amount selected by whoever is placing the order. But one should keep in mind that iceberg orders are not an available option on some exchanges. Platforms that offer direct market access support traders placing an “iceberg order.”

Bottom line

With substantial knowledge about an iceberg order, it would be easy for anyone to understand how to use it to avoid crypto price disruption. While these manipulative strategies used to be a part of the traditional financial market, nowadays, crypto traders are using them as a tool to keep the market stable.

FAQs

Why does an iceberg order matter?

The crypto market is typically volatile, with asset prices that cannot be predicted in advance. In a situation like this, iceberg orders bring stability, which is why they matter so much.

What is another name for iceberg orders?

Such orders are processed by market makers or the party that provides offers and bids. Therefore, it is also called “reverse orders.