# Iceberg Orders Explained: Definition, Uses, and How to Spot Them

## What Is an Iceberg Order?

Iceberg orders cleverly disguise large trades by splitting them into smaller limit orders, concealing the true size to prevent market disruptions. This trading strategy is essential for institutional investors aiming to manage large volumes without drawing attention. Visible orders in this system are a mere "tip of the iceberg," hinting at the sheer volume hidden beneath.

### Key Takeaways

*   Iceberg orders are large orders divided into smaller limit orders to hide the true quantity and reduce market impact.
*   These orders are typically used by institutional investors to buy or sell significant amounts of securities without alerting the market.
*   Traders can identify iceberg orders by spotting a pattern of similar limit orders from a single market maker.
*   Iceberg orders create support or resistance levels that traders may use to make short-term trading profits.
*   The visible portion of an iceberg order is executed first, with the hidden part executed only when it becomes visible.

## Understanding the Structure and Function of Iceberg Orders

[Institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) use iceberg orders to buy or sell large quantities of securities without alerting the market. Only a small portion of their entire order is visible on [Level 2](https://www.investopedia.com/terms/l/level2.asp) order books at any given time. By masking large order sizes, an iceberg order reduces the price movements caused by substantial changes in a stock's supply and demand.

For example, an institutional investor might avoid placing a big sell order that could trigger panic. Using smaller limit sell orders can be more acceptable and hide the selling pressure. Conversely, an institutional investor wanting to buy shares cheaply might avoid large buy orders to prevent day traders from bidding up the stock.

Previous research [has indicated](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108485) that traders tend to place order types similar to the amount and pattern of iceberg orders, thereby increasing liquidity and minimizing the impact of the iceberg order on overall trading.

## How to Spot Iceberg Orders in Trading

Traders can spot iceberg orders by observing repeated limit orders from the same [market maker](https://www.investopedia.com/terms/m/marketmaker.asp). For example, an institutional investor might break an order to buy one million shares into ten different orders for 100,000 shares each. Traders have to watch closely to pick up on the pattern and recognize that these orders are being [filled](https://www.investopedia.com/terms/f/fill.asp) in real-time.

Traders looking to capitalize on these dynamics might step in and buy shares just above these levels, knowing that there's strong support from the iceberg order, creating an opportunity for scalping profits. In other words, the iceberg order(s) may serve as reliable areas of [support](https://www.investopedia.com/terms/s/support.asp) and [resistance](https://www.investopedia.com/terms/r/resistance.asp) that can be considered in the context of other [technical indicators](https://www.investopedia.com/terms/t/technicalindicator.asp).

For example, a day trader may notice high levels of selling [volume](https://www.investopedia.com/terms/v/volume.asp) at a certain price. They may then look at the Level 2 order book and see that most of this volume is coming from a series of similarly-sized sell orders from the same market maker. Since this could be the sign of an iceberg order, the day trader may decide to [short sell](https://www.investopedia.com/terms/s/shortselling.asp) the stock due to the strong selling pressure from the constant stream of limit sell orders.

Exchanges typically prioritize orders based on the sequence in which they are received. In the case of an iceberg order, the visible portion of an order is executed first. The hidden portion of an order is executed only after it becomes visible in the order book. If traders have already placed orders similar to the iceberg order, then they are executed after the iceberg order's visible portion.

## Iceberg Order Example

Suppose a large pension investment fund wants to make an investment of $5 million into stock ABC. News of the fund's investment could cause a massive spike in ABC's price within a short period of time. To avoid such a disruption, the fund devises an iceberg order that splits its original order into smaller lots of $500,000 each.

## The Bottom Line

Iceberg orders enable institutional investors to buy or sell large quantities of securities without impacting market prices. By dividing large orders into smaller, visible limit orders, they prevent significant price fluctuations. Traders can identify iceberg orders by observing repeated patterns of limit orders from a single source, offering potential profit opportunities. Understanding these dynamics helps traders make informed decisions and capitalize on the support and resistance levels iceberg orders create.