Professional traders with deep pockets can sometimes get more than they bargain for when executing orders. Slippage, slow order execution, and other side effects of trading large amounts only get more pronounced as position sizes increase to institutional-scale.
To avoid these hazards, institutions use advanced order types to closely control the buying and selling process. This ensures they get what they order regardless of market conditions.
Simple order types
Most cryptocurrency trading platforms offer two types of orders:
– Market orders that deliver an immediate transaction without guaranteeing the execution price.
– Limit orders that buy or sell at a specified price but are not guaranteed to execute.
These order types are adequate for retail traders with relatively small accounts but don’t offer institutions the ability to tailor orders according to their needs.
Advanced order types
As an institutional-grade cryptocurrency exchange, eToroX offers advanced order types that enable sophisticated trading strategies. These allow professional traders to split orders and set specific conditions for buying and selling.
Time-in-force is a variable for a limit order that allows traders to specify how long the order will stay active.
Adjusting the time-in-force allows institutional traders to minimize the risk of a bad fill, and reduce the workload of monitoring trades by setting orders to execute or automatically cancel by a specific time.
eToroX offers four different types of time-in-force orders:
Fill-or-Kill (FOK) orders are either immediately executed at a specified price, or completely cancelled. A FOK order might be used by a big trader to minimize the risk of the market moving against them: If sufficient liquidity is available, the order will be filled all at once. If not, the order will be immediately canceled (or killed). This reduces market impact by allowing the trader to quickly dip in and out of the market.
Immediate-or-Cancel (IOC) orders are similar to FOK orders but they accept partial fills. If there is insufficient liquidity, only the portion of the IOC order that cannot be immediately filled will be canceled. IOC orders are typically used to get as large a position as possible at a specific price. Just like FOK orders, IOC orders prevent big players from moving the market because any portion of the order that isn’t immediately filled gets canceled.
Good-Til-Canceled (GTC) orders stay active until the trade is either executed, or manually canceled. These orders are typically used by institutions that want to buy or sell at a specific level away from the current price.
Good-Til-Date (GTD) orders allow traders to specify a date when the order will expire. The order will then remain active until it is either filled or the preselected date passes. Institutional players might use these orders to try and buy an asset at a specific price before the date of a future price catalyst.
The presence of big players on the order book can spook the market, causing volatility as traders anticipate a sudden shift in the balance of supply and demand.
At the same time, large orders also attract the attention of small traders trying to get in the slipstream of professionals. These traders will place orders slightly above or below institutional orders, making them more difficult to execute successfully.
A more sinister aspect is when traders can detect that an institutional player is about to liquidate a large position could short the asset and drive down the price before the institution is able to get filled at their desired level.
To avoid these market hazards, professional traders use iceberg orders which automatically break large orders down into smaller chunks to conceal the real size. These small chunks are then drip-fed to the order book one at a time. When one order fills, the next is sent to the market.
For example, an institutional trader might break down a large order for 200 bitcoin into ten different orders for 20 bitcoin each and then gradually dribble them to the market.
This allows the trader to keep a low profile, enjoy smooth order execution at the desired price, and protect their privacy by not disclosing the full size of the order. This is particularly important in the cryptocurrency market where the movements of institutions can be tracked on public blockchains.
By allowing institutions to minimize risk and maximize profit with advanced order types, eToroX delivers a smooth trading experience — allowing the cryptocurrency market to accommodate the high levels of institutional liquidity needed to reach maturity.