Icebergs, Retail & RS

Assiduous Reader madequota told me in a comment that:

I’ve mentioned the other cloaking device they use as well, the so-called ‘ice-berg” order. Can I strategically advance my cause as a retail investor by using icebergs? NO. Can I mislead other investors by coming into the market anonymously? NO. Does Regulation Services see a conflict in this? NO.

and later that

I’ve dealt with a number of different brokers, and all confirm that “iceberg” orders, and the option of listing orders under broker 1 are institution-only tools, and Regulation Services is the body that is responsible for this. Perhaps the people I have spoken too were misinformed, but they are consistent in their explanations, so I tend to buy into it.

OK … I’ve been in the business for a while. On the inside, and I’ve occasionally had to get the absolute truth of some matter or other. I have learned one thing: Don’t Trust What Anybody Claims About The Rules.

Company policy, tradition and wild guesses will often be confused with The Rules. This applies to operations personnel, traders, compliance people … anybody.

So I asked the horse’s mouth:

I have been advised that retail clients are not permitted to enter iceberg orders on the TSX due to rulings of Regulation Services.

Can you confirm this? Are there any documents on your website pertinent to the discussion or communication of such a ruling?

Here’s how Regulation Services responded to my query:

Thank you for your email inquiring about Iceberg orders and retail clients.

Market Regulation Services Inc. (RS) is not aware of any such restriction. UMIR 6.3 Exposure of Client Orders requires a client order that is less than 50 Standard Trading Units and less than $100,000 value to be immediately disclosed.  There is an exception to that rule that if the client requests that the order not be fully disclosed then the rule does
not apply.

Here is a link to UMIR 6.3. I suggest that clients of discount brokerages should write letters to the Big Bosses of these brokerages politely asking for the capability to be added to the software.

Update: “Wait a minute!” mutters the baffled crowd “What’s an iceberg order?”

They were introduced on the TSX in 2002:

Using compliant access technology provided by one of the Toronto Stock Exchange’s and TSX Venture Exchange’s Order Access Partners, a Participating Organization or Member may enter a large order of several thousand shares, but describe a “disclosed” portion, which may be as few as 2,000 shares. Those disclosed shares will be displayed to traders and the public, but all shares, up to the entire balance, are eligible to trade at any time – albeit after any and all disclosed volume at the same price.

If the Iceberg order is filled in portions, its disclosed portion, which fills first because of its disclosure, may eventually be decremented to zero. At this point, the displayed portion of the Iceberg order will automatically refresh to the original disclosed amount, repeating as necessary until the entire balance is traded. When an Iceberg order refreshes, it receives a new time-stamp, allowing other same-price orders an opportunity to move up in the time queue.

You would use them, for instance, if you wanted to sell 20,000 preferred shares and couldn’t find a block buyer (or didn’t want to ask around, for fear of moving the price). If you put in an order to sell the whole block at 21.50 as a regular order, you’d probably scare away the bids … with that kind of size overhanging the market, many traders will figure the market’s going to move down. And maybe they’ll back off on what bids they do have, hoping that you’ll get desperate.

So with an iceberg, you can just show it 2,000 at a time. Assuming that it’s just a straight sell – nothing to be done on the other side – this would be (slightly) superior to instructing a more complex algorithmic software package to do the same thing. Algorithmic software does have a latency factor … trade #1 would get filled, the TSX would notify the seller’s machine, the software figures out it has to put in another order, it transmits it, the order is checked and accepted by the TSX and then gets displayed. This doesn’t take much time, but it does take some time. If somebody had put in, say a market order to buy 5,000 shares, you would miss the last 3,000 of them, which would get filled at prices worse than yours before you’d even received notification of your fill!

And, of course, doing it manually will take even longer than software, by orders of magnitude.

Update, 2008-7-16 The minimum show for an iceberg is the greater of 500 shares or the Minimum Guaranteed Fill.

3 Responses to “Icebergs, Retail & RS”

  1. […] Not much today! I did, however, post about RS’s attitude towards icebergs and Inflation Expectations … you guys will just have to make do with that. […]

  2. madequota says:

    Good Afternoon!

    As usual, an incredibly detailed, and very worthwhile explanation. Thank you.

    After reading RS’s bit, and re-reading it, and thinking about it, it looks like disclosure has never really been the issue. After all, anyone with a large number of shares, with iceberg capability or not, has the option of showing it to the market in bits and pieces. The iceberg simply makes it easier to enter, and has some immediacy advantages (per your description).

    The overriding issue that had me somewhat annoyed (and still does), is the “institutional” investor’s ability to use this tool, in sync with the broker 1 anonymity tool, to create a mystique that is just not available to the lowly retail investor. I hear you when you suggest that either, or both, of these tools may in fact be available with enough persistence, but my experience tells me that this would be a long and arduous task.

    In an unrelated point, I draw your attention to this Jim Flaherty news item just released:


    REUTERS Flaherty says to expect surprises in Canada budget [HPYRWMS]

    TORONTO, Feb 25 (Reuters) – Canadian Finance Minister Jim Flaherty said on Monday that there will be “one or two surprises” in the federal budget, which is due to be released on Tuesday.

    Flaherty also signaled that action on the capital gains tax cannot be ruled out.
    (Reporting by John McCrank; Editing by Peter Galloway)

    (c) Reuters 2008. All rights reserved.


    As someone actively involved in the investment industry, as you are . . . does this guy drive you around the bend with comments like this? What are your thoughts on the investment aspect of tomorrow’s speech from the mount? Any predictions on what “surprises” may await the pref share investor in general?



  3. jiHymas says:

    Regarding icebergs, all I can suggest is that you commence a letter-writing campaign – write all the execution services asking whether they offer the capability and encourage all your friends and acquaintances to do so as well.

    If you keep me abreast of your efforts, I’ll post about it!

    I’m afraid my predictions regarding the federal budget are no more likely to be right than my predictions regarding the market. I’ll go so far as to suggest that bonehead populism is on the agenda, though!

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