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An iceberg order is the descriptive name for a single order that is unusually large, and has been divided into a series of smaller lots that are individually placed according to a specified time line. Often, the idea behind an order of this type is to allow the investor to make the transaction without creating a great deal of disruption in the marketplace by buying or selling an enormous amount of a single security at one time. This strategy effectively places what is sometimes called the tip of the iceberg into the marketplace at any given time, making it much easier for the transaction to be carried out with relatively little attention being paid by other investors.
The process of placing an iceberg order is fairly straightforward. An investor chooses to buy or sell a huge lot of shares of the same security, such as a block of stocks. Rather than causing the market where the security is traded to undergo severe shifts due to the large number of shares involved, the investor works out a schedule for a series of transactions with a broker or dealer. The broker continues to execute these transactions according to the agreed-upon time schedule until the entire order has been completed, while avoiding market fluctuations that may be undesirable for the investor or for the marketplace in general.
For example, if an investor wanted to sell a million shares of a given security as an iceberg order, he or she may choose to forego dumping all the shares on the market at one time. Instead, the broker is authorized to sell the million shares in lots of fifty thousand over a period of six to eight weeks. At carefully spaced intervals, the broker sells another fifty thousand shares on behalf of the investor. The end result is that the market is not upset by the incremental sale of so many shares, and the value of the shares held by other investors is not adversely affected. In contrast, dumping all million shares at one time could create significant changes in the marketplace, including causing the value of the shares to drop considerably.
In order to aid in structuring an iceberg order, software programs are often used to work out the logistics. This helps to ensure that each segment of the order is executed at the proper time and under the right conditions, so that the effect on the marketplace is kept to a minimum. At the end of the series of transactions, the investor has either sold or purchased the desired number of shares, with those shares valued at a price that is acceptable to the investor. In the interim, the public never notices the iceberg order, since no single huge order was ever placed, only a series of smaller orders that tend to be overlooked in the general day to day activity in the marketplace.