Institutional investors and speculators who trade large amounts of bitcoins are adopting a new method to hide the true size of their transactions. They are doing this - many times with the silent help of many major exchanges - to reduce the risk of exposing their intentions to the market, whether bullish or bearish, which could cause unfavorable price movements.
The Iceberg Order to stabilize the market
Avi Felman, head of trading at BlockTower, took notice of one such transaction in the last week of December when an individual, or perhaps an institution, bought a substantial amount of bitcoin (quotation BTC) on the US-based cryptocurrency exchange Coinbase.
However, the order log only highlighted a repeat offer of buy orders for 20-40 bitcoins at a time. Essentially, a large amount of BTC was bought through smaller orders.
This has wider implications on the market. If an institution made a large order public, it would communicate its position to the rest of the market, causing other institutions to move against it.
Having smaller orders, in essence, deceives market players into thinking that there isn't much interest at lower price levels when in fact there is. For example, a trader looking to buy 1.000 bitcoins makes a bid (buy order) for 50 and waits for the exchange to execute a partial transaction, say 45 for example, before reloading the order to 50.
The process is repeated until the entire sum of 1.000 bitcoins is covered. According to David Lifchitz, chief investment officer for Paris-based trading firm ExoAlpha, the top-up strategy is similar to the "Iceberg Order", which splits a large transaction into small orders, like an iceberg that hides most of the volume. of ice under the ocean surface.
Exchanges support algorithmic trading to avoid information leaks
The execution of these stealth strategies, which help stabilize the market and prevent significant swings, is only possible through algorithms (machine trading). As such, most exchanges offer support to institutions wishing to make an iceberg.
"Prominent exchanges such as Binance, Coinbase, FTX, Bitfinex, Bitstamp enable algorithmic trading," said Usman Khan, co-founder and CEO of APEX: E3, a cloud-based analytics platform for digital assets for retail and institutional investors , adding the hypothesis that most algorithms facilitate iceberg transactions to minimize information leakage.
“The software monitors order execution in real time and reloads orders until the amount defined by the trader has been bought / sold. The size of the order could also be randomized on each refill, ”Rek said.
However, more experienced traders can sniff out the iceberg by looking for a series of limit trades (an order to buy or sell bitcoin at a specific or better price) that appear repeatedly in the order log. For this reason, institutions do not rely on a single trading platform and run the iceberg on multiple exchanges.
