Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Iceberg Order

What it is:

An iceberg order is a large order that has been split into several smaller orders to conceal the "real" size of the order.

How it works (Example):

Let's assume Company XYZ is a $50 billion pension fund. It often buys and sells shares of stock in 100,000 units. Today, the fund manager wants to sell off the fund's 250,000-share position in Company ABC, which it believes has peaked.

The average order volume for Company ABC stock is 25,000. An order 10 times that size would surely cause a stir in the market and likely encourage other investors to sell their shares, too. In turn, a sudden, massive sell-off could tank the price of the stock while Company XYZ is trying to execute the trade. In turn, it might only be able to sell the shares for, say, $10 a share rather than the $15 they're currently trading at.

To mitigate this, Company XYZ puts in an iceberg order, which breaks the 250,000-share sell order into 10 orders of 25,000 shares each. These orders, executed individually over a specified time (usually days or weeks), look like ordinary trades to the rest of the market, which will not get the tip-off that a major investor is bailing out. Each of these 25,000-share trades are "just the tip of the iceberg."

Why it Matters:

Iceberg orders seem sneaky, and to some extent they are, in that the market does not know that the same shareholder is selling all those shares. However, iceberg orders also stabilize the market and help prevent major swings in stock prices, which is why some exchanges offer support and services to members who want to book iceberg orders.