Definition of iceberg order

An iceberg order is a type of order placed on a public exchange. The total amount of the order is divided into a visible portion, which is reported to other market participants, and a hidden portion, which is not. When the visible part of the order is fulfilled, a new part of the hidden portion of the same size becomes visible.

As an example, suppose that a market participant places an order on the London Stock Exchange to buy 1,000 shares of stock AAAA at no more than 120p per share, with a visible portion of 100 shares. Other traders will see a buy order for 100 shares at 120p, with the other 900 remaining 'dark' or hidden. If someone places an order to sell 100 shares at 120, then the visible portion will be fulfilled. A new visible order to buy 100 at 120 will appear on the order book, and an order to buy 800 shares will remain hidden.

Iceberg orders are allowed under the Mifid rules, which enforce transparency of securities trading in the European Union, through the 'order management' waiver to pre-trade transparency. This waiver means that orders can be hidden from the market, if this is done to facilitate trading strategies which could be accomplished without hidden orders. In the case of iceberg orders, this means that instead of placing an iceberg order, a market participant could place a normal limit order and replace it by a new order for the same amount each time it is fulfilled. Since there is no difference in what the other market participants would see, the iceberg order simply makes it easier to carry out this strategy automatically, and does not give any unfair advantage.

Exchanges decide which among several orders at the same price level should be carried out first by using time priority, or 'first come first served'. In the case of iceberg orders, the visible portion has normal priority but the hidden portion has lower priority than any visible order. This means that an order placed after an iceberg order will execute after the visible portion but before the hidden portion. For exchanges governed by Mifid this system of priorities is a legal requirement. The method of determining priority between the hidden portions of different iceberg orders varies from exchange to exchange. [1]

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