Hidden orders are an order option that some brokerages offer to mask the true size of an order.

While not actually ‘hidden’, the brokerage will use various tactics to minimize the potential impact of a hidden order on the market, generally through breaking the order up into smaller pieces and using advanced algorithms to place the smaller orders at optimal times.

Purpose of Hidden Orders

Institutional clients that make large orders may often make use of a hidden order facility with their brokerage to place stop or limit orders that have the potential to significantly impact the market activity for a security, though smaller traders may also use this facility when trading in thinly-traded securities.

The rise of algorithmic trading in particular has made the use of large single-block orders increasingly hazardous, as these algorithms can manipulate security prices in the short term to profit from the existence of large block trades on the order books.

Hidden orders can limit the potential hazards of placing large orders by hiding the true volume of demand from other traders.

Hidden Order Drawbacks

The main drawback of using hidden orders is that the full order may often go unfilled at the target price, forcing the trader to accept a lower volume or a less favorable price.

Most hidden orders are placed at the last second, after all the other brokerage’s orders, which means that the price may have already moved once the hidden order is ready to be filled.

Hidden orders can also carry additional fees or commissions that can reduce or negate any savings from using the hidden order in the first place.

Hidden Orders and Trading

Day traders are most likely to use hidden orders when trading in small cap equities or obscure commodities, where even modest order sizes can have an impact on the price action.

Many brokerages offer the facility to effectively create your own hidden orders by entering multiple orders at once with varying order sizes and priority, which avoids any added fees and potential undesirable outcomes that may occur from the brokerage executing the hidden order itself.

Generally speaking, day traders will be unable to notice when a hidden order is being executed, as the use of algorithms has made this process too fast for a human trader to track, though they may be able to do so through the use of their own algorithmic trading system.

Final Thoughts

While not truly ‘hidden’ in the strictest sense, hidden orders allow traders to mask the true size of their orders, which may protect them from one or more harmful consequences of placing large block orders in the market.

The rise of algorithmic trading has made large block orders particularly vulnerable to price manipulation by high-frequency traders, which has increased the demand for a hidden order facility from brokerages.

Day traders can often create their own hidden orders by inputting multiple smaller orders with varying priorities, which allows them to better control the outcome of their hidden order and avoid any added fees or commissions charged by their brokerage for executing hidden orders.