SGX seeks to remove ‘iceberg order’ function
The Singapore Exchange (SGX) is seeking to remove a trading-engine function provided to market participants in both the securities and derivatives markets to slice large orders into smaller ones.
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Jamie Lee
04 January 2012
The Singapore Exchange (SGX) is seeking to remove a trading-engine function provided to market participants in both the securities and derivatives markets to slice large orders into smaller ones.
The ‘engine-level iceberg order’ function, as it is known, is not commonly used by market participants, with some already relying on alternative automated trading functions to slice their large orders, SGX said yesterday in a consultation paper.
An ‘iceberg order’ is so named because investors can see only the ‘tip of the iceberg’ of these large orders. Choosing such an order type would allow participants to publicly disclose only a part of a block trade that has been submitted.
This function allows market participants to slice a large single order into smaller lots, usually by the use of an automated programme.
Such a slicing strategy is the basis of high-frequency trading, which cuts up large trades to mask the size of the order, to prevent too much price fluctuation that has an impact on trading profit.
SGX said that the ‘iceberg order’ type is generally used by sophisticated market participants who trade in large quantities.
‘The order functionality is little utilised by the marketplace as similar execution functionalities are offered in the order management systems of brokers and automated execution desks to execute their block trades,’ it said.
As a result, the function is ‘of little benefit to the market’, it added.
An institutional broker told BT that the move is to make way for the more sophisticated form of algorithmic, or algo, trading.
‘Iceberg orders are the basic form of algo trading,’ he said, adding that such orders allow traders to cut up orders, spread and release them, but over regular intervals.
In contrast, today’s algos allow traders to release orders at any given time during trading, depending on calculations that show where the price inefficiencies are.
High-speed traders then quickly capitalise on the mismatch in pricing.
‘Algos have become more advanced and more complicated,’ the broker added.
Data cited by SGX showed that ‘engine-level iceberg orders’ accounted for a negligible number of orders.
SGX said that these orders can be entered in the opening and closing routines, with the entire order volume - that is, both those shown and hidden from the public - used to calculate the equilibrium price.
Removing the iceberg order type will allow more transparency in the opening and closing routines, and in the calculation of the equilibrium price, SGX said.
SGX is soliciting feedback from now until Jan 16.