Zerodha introduces Iceberg orders on Kite; check out how it works

Online brokerage Zerodha's founder and CEO Nithin Kamath announced on Thursday that the firm has introduced Iceberg orders on Kite, which is its flagship trading platform.  

Kamath explained that the Iceberg orders have been introduced "to slice large orders into smaller legs that are executed only once the previous leg is, helping reduce impact costs"

In a tweet, Kamath explained that active traders lose much more to impact costs than all charges, especially with larger trades. Impact cost is the difference in the actual traded price as compared to the price of the instrument when the order was placed. 

"Impact cost, or the money a trader loses in the bid-ask spreads, increases substantially with high volumes or overtrading. Given the very low brokerage costs, it is easy to think that quick buy & sells at small price difference can generate profits, but very tough in reality," noted Kamath in a Twittter thread. He also gave an example of how this works. 

"For eg, if an option is at Rs 50 & the bid-ask spread is Rs 0.5, in 10 trades, a trader will lose Rs 5 or 10% of the premium. To profit, a trader not only has to get the direction right, but also be right by a margin of 10% (impact cost) Most traders ignore to factor this in," he wrote 

The Zerodha CEO further added, "You can now also set the validity of all order types in minutes. This can help traders who want orders to be cancelled if not executed within a certain time after a trading signal is generated or after a few minutes of the market opening or a news event & more."

How do Icebergs work?

Iceberg is an order type that slices orders of larger quantity (or value) into smaller orders, where each small order, or leg, is sent to the exchange only after the previous order is filled.

This helps reduce the impact cost of execution in addition to not revealing large orders in the market depth bids and offers. Icebergs are a very popular order type amongst institutional traders, explained Zerodha in an official statement. 

When a large order is placed, it is divided into smaller orders or legs, and only the first leg is placed on the exchange at first, revealing only the tip of the iceberg. Once this leg is executed, the next leg of the main order is placed, and so on, until the desired quantity is traded. The number of legs is decided by the customer. 

Follow these steps to place an Iceberg order:

• Click on Iceberg on the order window.
• Select Intraday or Overnight.
• Enter Quantity and the Price.
• Select Market or Limit.
• Enter the Number of legs and click on Buy or Sell. The maximum number of legs per Iceberg is 10. 

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