Hidden Orders in Stock Trading: Avoiding Slippage but Delayed Execution

Trading stocks profitably means buying when others sell and selling when others buy at wrong prices. Stock trading brings buyers and sellers together submitting innumerous trading orders daily. Finding an advantage in the stock market can be the same as buying stock under oversold conditions, having access to vital information or exploiting a market’s misbalance. No matter how traders decide to buy or sell, they all need to route their orders through a stock exchange and let the world know of their decision. Unless their orders are hidden! Hidden orders in [intlink id=”13″ type=”category”]stock trading[/intlink] show no evidence of their existence in either the market data or the deep book. However, they do have a disadvantage and that is their delayed execution.

I’ve read quite a few remarks about hidden orders online. Others claim that hidden orders are for big volume trades while at the same time several traders prefer hidden orders for every single trade of theirs. Since the option is available for even 100 shares, why not use it as they say and hide their intentions. I myself didn’t know of hidden orders until recently. True, if you are trading in large quantities, hidden orders may help minimize the slippage as advantage and avoid moving the market before getting your order executed. There’s nothing more annoying other than placing your order and watching the market go as you predicted, leaving you staring at the unexecuted trade, calculating the profits you would have made.

On the other hand, hidden orders do have a disadvantage. Most stock exchanges follow the following simple rule (Technology and Liquidity Provision: The Blurring of Traditional Definitions by Hasbrouck and Saar – PDF):

Execution priority follows price, visibility and time. All visible quantities at a price are executed before any hidden quantities are executed.

Therefore, hidden orders placed at a certain price are going to be executed last, no matter the time of their submission. Say there are 5,000 visible shares at $10.0 bid price. A trader submits a hidden buy order of 10,000 shares at $10. The bid column continues showing 5,000 shares. Now I want to buy 7,000 shares at $10 and my visible order increases the bid at 12,000 shares. The trader, who submitted their order before me, now has to wait for my order to be executed before their hidden order makes to the market, although they submitted their order earlier than me. They have to move it up a cent ($10.01) to get in front of my trade.

How to create a hidden order at Interactive Brokers

Traders can create hidden orders at Interactive Brokers when they place their orders. In the order screen or line they have to tick the checkbox in the Hidden field. If you can’t find the Hidden field, you need to enable it in the Interactive Brokers’ configuration screen. Add it in the shown order columns of your Quote Manager’s layout under the trading tools as the screenshot shows.

Depending on the exchange the order would be acknowledged as a hidden order. If hidden orders are not supported by the exchange, a hidden order must be simulated by the broker. One way the broker could simulate it is to just show one contract at the exchange. When that one gets hit, show another and so on. By doing that, the broker never shows the full size of the order.

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