Advanced traders look to Level 2—or L2—quotes for information about what open orders are on the order book at any given time, and how those orders could push a stock’s share price in one direction or the other. Sometimes, however, the L2 quotes are just the tip of the iceberg.
Large retail traders and institutional traders often find themselves trying to buy and sell massive quantities of a single stock. Gobbling up or dumping millions of shares of stock can single-handedly impact the market price of even a relatively liquid stock. In addition, placing a single sell order for 10 million shares could easily trigger more selling as soon as the order shows up on the L2 quotes.
Instead, large traders will often choose to break up large orders into a series of smaller orders in an attempt to keep the trade under-the-radar. These types of trades are called iceberg trades because only a small portion of the entire order is visible on L2s at any given time.
The whole point of placing an iceberg trade is to camouflage the order, so identifying iceberg orders can be nearly impossible. However, there are some tell-tale signs that traders can look for.
Iceberg orders will often appear as a limit order from a single market maker that seems to reappear repeatedly. Instead of a single order to sell 10 million shares, an iceberg order might appear as 20 different orders to sell 500,000 shares. As soon as one order is filled, another will appear. This type of behavior is easiest to recognize if all the smaller orders are the same size, which won’t always be the case. Only by watching closely and picking up on the pattern can traders recognize an iceberg order is being filled in real-time.
Recognizing iceberg order quickly can be a trading opportunity. There’s no way of knowing exactly how large an iceberg order is, but many are large enough to single-handedly provide short-term support or resistance for a stock. Traders can trade against this support or resistance using the iceberg order as a guide.
For example, if a trader sees repeating orders from the same market maker to buy 500,000 shares of a stock at $10.00, stepping in and buying at $10.01 could provide an opportunity to scalp profits in the $10.02 to $10.10 range knowing that the huge order at $10.00 is there to limit downside.
To most traders, a single buy order for 500,000 shares may not appear to be a major source of support. But traders that recognize the order is part of a much larger iceberg order know that the visible 500,000-share buy order may actually represent demand for millions of shares.
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