The Impact of Iceberg Orders in Limit Order Books

49 Pages Posted: 27 Mar 2008 Last revised: 2 Jun 2009

See all articles by Stefan Frey

Stefan Frey

Centre for Financial Research (CFR); Leibniz Universität Hannover

Patrik Sandås

University of Virginia

Date Written: May 17, 2009


We examine the impact of iceberg orders on the price and order flow dynamics in limit order books. Iceberg orders allow traders to simultaneously hide a large portion of their order size and signal their interest in trading to the market. We show that when market participants detect iceberg orders they tend to strongly respond by submitting matching market orders consistent with iceberg orders facilitating the search for latent liquidity. The greater the fraction of an iceberg order that is executed the smaller its price impact consistent with liquidity rather than informed trading. The presence of iceberg orders is associated with increased trading consistent with a positive liquidity externality, but the reduced order book transparency associated with iceberg orders also creates an adverse selection cost for limit orders that may partly offset any gains.

Keywords: Hidden Liquidity, Iceberg Orders, Limit Order Markets, Transparency

JEL Classification: G10, G14

Suggested Citation

Frey, Stefan and Frey, Stefan and Sandas, Patrik, The Impact of Iceberg Orders in Limit Order Books (May 17, 2009). AFA 2009 San Francisco Meetings Paper, Available at SSRN: or

Stefan Frey

Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923

Leibniz Universität Hannover

Koenigsworther Platz 1
30167 Hannover, DE 30167

Patrik Sandas (Contact Author)

University of Virginia ( email )

McIntire School of Commerce
Charlottesville, VA 22904
United States
1-434-243-2289 (Phone)


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